The Limited Liability Company, from a lawyer's perspective. Absent transaction and administrative costs, a lawyer would recommend that each and every activity and asset be owned by a separate limited liability entity. In most cases, that entity would be an LLC. Why? Here are a few of the reasons.
The reasons to have activities separated arise primarily from the desire to have only the creditors associated with that activity able to collect from the activity. Consider instead the following hypothetical: An LLC owns 5 properties. A tenant or guest at one of the properties is injured in some manner which is either not covered by insurance or not fully covered by insurance. Perhaps the damages exceed the limits. Perhaps the LLC had a homeowner's policy instead of a landlord policy. Perhaps the claim was otherwise excluded for some reason (water, mold, etc). The plaintiff sues and gets a judgment against the LLC. The plaintiff now has the potential of collecting that judgment from all 5 properties including the 4 that had nothing to do with the claim. Contrast the case where each property was owned separately. A creditor of one LLC has no right to collect against another LLC, it is a separate owner. The strategy is to protect each asset so that its equity is only subject to attack by creditors of that asset.
Note, there are some caveats to this strategy. First, it is critical to maintain the entities as separate and distinct and to maintain the "corporate formalities" for each. Likewise, it is important to disclose to creditors including the general public that they are dealing with a limited liability entity. Advertising, forms, notices, cards, etc should make clear that the owner is "123 Main St LLC" and not the individual owners of the LLC. Further, an LLC owner can voluntarily agree to create joint and several liability among its LLCs. Many creditors such as lenders will insist upon cross-collateralization of assets. For obvious reasons the bank would like as many assets as possible to secure its loan, and often the lender will request that the borrower agree that its loan is secured by its assets and by the assets of other unrelated LLCs. The borrower must assess whether it is willing to create this "can of worms" in order to obtain the loan.
The primary reason for creating a limited liability entity is to limit the liability. This means to shield the assets of the owner from attack by creditors of the entity. The entity also will attempt to reduce the ability of creditors of the owner(s) to disrupt the entity's operations. An LLC operating agreement, for example, typically will include provisions relating to a charging order for creditors of the owners.
There are a variety of limited liability entities which could be used. Absent special circumstances which are unusual with our clients, we typically use an LLC because it is the most flexible form of entity. An LLC can choose to be taxed as a partnership or an S-Corp (or a disregarded entity in the case of a single member LLC). The operating agreement is very flexible in terms of ownership rights for management, control, and operations. The LLC is easy to set up and not difficult to maintain.
