THE CASTLE KEEP ASSET PROTECTION STRATEGIES GARRETT SUTTON
A client had sued Sammy over some very careless work a subcontractor had performed. The plumber had gone out of business and left the state, leaving Sammy holding the bag. A judgment was rendered whereby Sammy’ s sole proprietorship was held liable for the significant damages. Since the sole proprietorship offered no asset protection whatsoever, all of Sammy’ s personal assets were fair game for collection. And because Sammy hadn’ t used a protective entity to hold title to his duplex, the property was completely exposed to the claims of the judgment creditor.
As a result, Sammy lost all of his sole proprietorship assets, his trucks and equipment, as well as the duplex. All lost to satisfy the claims for damages he did not cause. It was a bitter experience Sammy vowed would never happen again.
Sammy immediately started operating his construction business for flipping properties through an LLC taxed as an S corporation. He began acquiring hold properties with a vengeance, putting them all into one LLC. Before long, he had three 4plexes and one triplex in his one LLC.
Then the second lawsuit was filed.
A tenant had fallen at the triplex. Sammy’ s insurance company used a loophole to avoid paying the claim. As the chart below indicates, the tenant prevailed in a lawsuit brought against the LLC that owned the triplex.
The good news was that Sammy’ s construction business and personal assets were not exposed to the claim. The bad news was that the judgment allowed the tenant to proceed against all of the assets in Sammy’ s Real Estate LLC. Two of the 4plexes were owned free and clear. The tenant’ s attorney was able to easily attach the 4plexes and sell them to satisfy the claim.
It was after this experience that Sammy came to appreciate that one did not want to own too many properties in one LLC or LP. By holding four properties in one LLC, a tenant with a claim involving one of the properties can reach the equity in all four properties.
Sammy decided that in the future, only one property would be held in each LLC. Putting too many properties in one LLC created an attractive target for the professional litigants of the world.