Transferring Title to LLC - Posted by Team Prosperity

Real Estate Investing Real Estate Law
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Posted by John Merchant on August 11, 2007 at 08:28:52:

Frank, I got into Google and put in something like this: " CA law homeowner and workers comp" and got the results I posted.

This probably would work for NY or any state to pull up whatever law there is.

It’d sure be good subject for some short seminars in all states so as to educate the homeowner what to watch out for and how to protect himself against the “Fernandez” that abound and proliferate.

You’re dead right on the likely problem coming from the eager hospital staffer (or welfare worker)eagerly trying to get into our pocketbooks.

This is why I’ve always advised people to be very careful when they answer the phone and not start out giving any info until they know who’s on phone and what they want.

Much better to wait and let the answering machine break the ice and for those who won’t leave a message, force them to write or knock on your door.

And don’t volunteer ANY info over the phone to any stranger.

We can all say, “Send me something in writing and I’ll look it over and be in touch with you” and be much safer for it…and if the caller really presses, say “my lawyer has advised me not to talk about this on the phone so I won’t, and goodbye now”.

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Transferring Title to LLC - Posted by Team Prosperity

Posted by Team Prosperity on July 30, 2007 at 18:08:27:

We currently own 8 investment properties (all in our personal names). Five are in GA and three are in CA. We set up an LLC last year and opened a separate bank account in the LLC’s name to manage cashflow, pay mortgages and other expenses. We have not transferred properties into the LLC’s name because we aren’t sure how and our accountant told us that the lenders may call the loan due when we transfer them. We want to protect our assets and use the LLC for property management as well. What’s your advice??

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Deed and CPA’s concerns - Posted by John Merchant

Posted by John Merchant on August 01, 2007 at 11:52:25:

You’d use a deed to transfer each property into the LLC, either a Grant or Warranty Deed.

If I were doing this I’d probably elect to use a separate LLC for each property so a property search wouldn’t unearth more than one property in that owner’s name.

These days a lawyer looking into suing you or me has to look no further than his desktop PC to learn IF the owner of property A also owns other properties… if he finds none he’s going to quickly lose interest in suing that owner.

Thus the value of an LLC is not only liability protection, like a corp., but also its anonymity features that make it a little more difficult for an outsider to find the properties it owns and who owns the LLC.

And with multiple LLCs as the owners of your various properties, anybody looking to see what LLC #1 owns is NOT going to easily find what LLC #2 owns…right? Right!

Now you’re going to ask WHERE the LLC should be chartered.

Well, while an oudastate LLC does have some advantages, if it’s “doing business” (renting a property IS DB) in CA or GA, their courts are going to hold that that such LLC must be registered there in CA/GA or if it has not registered there, it has lost all rights to assert defenses in their courts, and is then wide-open to being sued and nailed for most any kind of claim.

Therefore it’s normally just simpler to open and charter an LLC in the state where it is doing business…more expensive in some states but still more practical than trying to save money with the cheapest “outofstate” LLC

Your CPA, while technically correct, is not really “au current” re lenders calling loans via their DOS clauses; these days, they just aren’t doing so, as long as their payments are being made.

Why aren’t they?

Well, why should they? The notes are normally ARMs and as long as payments are being made, they don’t really care who’s making them. Since foreclosures cost money and they’d end up with lots of properties they’d then have to sell, it’s just easier to let things stand.

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Re: Deed and CPA’s concerns - Posted by Shirley

Posted by Shirley on August 01, 2007 at 13:45:56:

In CA, the state charges $800 min tax on each LLC each year. We also paid $800 to set up the LLC. If we set up each property in an individual LLC that could cost us approx. $11,200 in the first year. An investor that I know said that he has a liability insurance policy that would cover him should someone sue him. Any thoughts on that??

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Re: Deed and CPA’s concerns - Posted by Rich-CA

Posted by Rich-CA on August 06, 2007 at 21:44:41:

If the charges in CA are too high (I’m in CA), then organize the LLC in a state that is less expensive. I have my asset LLCs organized in Colorado where e-filing is $25 per LLC and there is no minimum tax (CA) or reporting fee (NV, DE, WY).

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Problems with ones’ own ins. policy - Posted by John Merchant

Posted by John Merchant on August 02, 2007 at 09:14:55:

Yes, CA does certainly have very high formation costs for LLCs, much higher than my state of WA or NV, etc.

An alternative here would be to shop around the country for an LLC to be established in another state at a lower cost…however the annual CA registration fees for an out-of-state LLC may also be sky-high.

And, since rental of a property is considered “doing business” by all states, the out-of-state LLC owner had better register his OOS LLC in that state or he (his LLC) loses all kinds of legal rights…right to sue or assert legal defenses if it is sued.

But liability insurance is not any kind of guaranteed solution, even with a big “umbrella” policy or coverage.

A BIG underlying problem with such ins. coverage is that although you may HAVE a great liability insurance policy, that’s NOT a guarantee the insurance co. will choose to fully honor the policy if and when you get sued.

Many, many liability claims are denied by the liab. ins. co. on the grounds that the ins. policy doesn’t cover that kind of claim, or a particular claim because the ins. co. wasn’t notified in a timely manner, or their own insured did something deleterious to the interest of the policy (maybe trying to work out his own claim without notifying the ins. co. of a claim being made), etc., etc., etc.

These are called “policy defenses” and are used by insurers all the time to attempt to evade policy obligations.

I’ve been involved in lots of these policy defense cases and know how often the defense is raised by the ins.co. against its own insured.

In lots of these PD cases, the ins. co. will pay its own lawyers to defend their insured but notifies all parties upfront (usually, but sometimes done much later…even during a lawsuit and trial of the case!) that they are claiming a policy defense and will NOT be paying their insured’s damages in the event the jury finds against the insured.

Ergo, merely HAVING an ins. policy is NOT any guarantee the ins. co. will cover the insured or pay any judgment rendered against the insured or pay any kind of settlement on behalf of their insured.

Fact is most insurance policies are never read by the insureds so most insureds really don’t understand what’s required of them if and when they do get sued or claim is made.

I’ve seen many such where the insured had no idea he should even notify his own ins. co. if he/she is notified of a claim so not until he gets sued does it occur to him to tell his ins. co. about it.

And sometimes even a knowing insured person does not even know himself about a coming claim so has no opportunity to notify his own company.

Let’s talk about a hypothetical to make this clearer…Don Defenbach owns a rental in GA but DD lives in CA and does not personally manage his rental.

Pedro Plaintificado rents that GA property for a time but then moves out…and some years later notifies you that his little girl got hurt while they lived in your house and is now making a claim against you based on your alleged negligence in how you maintained that property.

You notify your ins. co. immediately but that ins. co. demurs, telling you by letter that they aren’t going to be paying PP or his little girl anything because YOU didn’t notify them in a timely manner.

So, to repeat, just because you or I HAVE a liab. policy is not any guarantee that will cover us in the event of a claim.

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Re: Deed and CPA’s concerns - Posted by Frank Chin

Posted by Frank Chin on August 02, 2007 at 03:44:49:

Shirley:

I’ve checked into the issue of carrying large insurance policies, and using LLC’s in minimizing riks. I recently asked my “insurance agent” to do some research for me.

First, my concerns started when I had a fire at a business I owned, and had workers covered under “workman’s comp”. I did some research into this issue, and found that under NY State law:

  • State law prohibits workers from suing employers when covered under workman’s comp.
  • State law allows worker’s suing “owners, officers” so they can sue me even if it’s an LLC, for injuries if they are NOT oovered.

Having said this, my insurance guy agreed with me that these are the categories of people will be suing me if something happens:

  • Tenants, and their visitors.
  • Passersby, such as in slip and fall cases.
  • Handyman type workers I use, or tenants I use to, for instance, shovel snow.

In the third case, I use handyman for instance to fix leaks on roofs, and when most of them come, they use my ladders to go on the roof. The questions is, for a NOO policy, if these guys falls of the roof, can they sue me.

My agent ask why I don’t use licensed contractors all the time. I told him that in my business, I can get a many licensed roofers to put on a new roof. But if I tell them I need help on a small leak, I can’t get the licenses contractor to come, even if they were the one’s that put in the new roof.

To the questiom whether these handyman can sue me, the answer is, yes, and against me as an employer, So if I had a workman’s comp policy, he will be covered, is prohbited from suing me, or the LLC if I the property is held in one. However, even with an LLC, he can sue me personally, under a workman’s comp situation, and the insurance will not cover me.

One way we’re exploring is that because I have an “RE Management Company” set up for health insurance purposes, I can get a workman’s comp policy for myself, and then add on employees as they come and go.

The issue we’re checking on is how much salary is considered for the owmer is sufficient for workman’s comp audit purposes.

I see that if I got this workman’s comp angle covered, it might offer me protection more than an LLC would.

But we’re still looking into LLC’s as another layer.

BTW, I also found that under “homeowner’s” policies, where the owner lives there, under NY State insurance law, workman’s comp is included. So I am safe using a handyman for my own home if he fell off the roof.

Frank Chin

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Re: Deed and CPA’s concerns - Posted by Bob Smith

Posted by Bob Smith on August 06, 2007 at 23:18:49:

NM LLCs are good, too. One filing fee of ~$100, no annual fee, no annual reports. You don’t even have to give the names of the officers or members.

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Re: Problems with ones’ own ins. policy - Posted by Rich-CA

Posted by Rich-CA on August 06, 2007 at 21:48:13:

You don’t have to register ownership LLCs in the state where the property is unless you engage in business activities. I have one “Operating” LLC that handles collecting rent, signing contracts and so on in the states where I have properties. I write and file (my file folder, not County Recorder) an operating agreement between the asset company and the operating company. This reduces the local tax exposure to one company per state while being able to have one company per property.

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Re: Problems with ones’ own ins. policy - Posted by Bob Smith

Posted by Bob Smith on August 04, 2007 at 13:43:28:

California will charge you the $800 fee even if the LCC is foreign, so there’s no point in forming a foreign LLC in CA. You can’t use series LLCs either because the CA Department of Revenue has ruled that the fee applies to each series and there’s no statutory support for respecting the series’ internal firewalls.

As to your hypothetical, the insurance company didn’t refuse coverage because you weren’t timely. The insurance company is refusing coverage because you bought a cheap policy that only covers claims made during the policy period, rather than events occurring during the policy period.

The occurrence policyâ??s coverage trigger is tied to the date of the event or accident giving rise to the claim. Under an occurrence contract, the policy in force on the date of the event causing the loss must respond with both defense and indemnity. The claim may arise years after the policy has expired, and the occurrence coverage trigger places little or no importance on the date the insured receives notice of the claim.

In the case of a claims-made policy, however, determination of coverage is triggered by the date you first became aware and notify the insurer of a claim or potential claim. The insurerâ??s policy in force on the date you became aware and give notice is the insurer who must defend and settle the claim.

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Some NY WC questions - Posted by John Merchant

Posted by John Merchant on August 02, 2007 at 17:04:31:

Hi Frank

I was once very involved in WC law in several states so I know that normally, the private small employer is exempted from being required to cover an employee by state WC law if he’s only employing 1 or 2 employees.

What is NY law on this? Does the small employer have to carry WC or he exempted?

If not, it’s been my experience he CANNOT even buy it in such a state, at any price.

I’m in WA State and checked this WA law a few years back when I wanted to hire a handyman for same purpose as your example…doing some work on my steep pitched roof, clearing it of moss…and I didn’t want to be liable if he fell and hurt or killed himself.

Checking WA WC law, I found the small employer of one or two employees in WA was exempted* and couldn’t buy WC even if he wanted it so I couldn’t get it for any employee I might want to hire.

My solution was to draft a Contract and take bids from Independent Contractor on a contract I drafted that included a Waiver of Claims for any injuries the Contractor might suffer when carrying out his contract…and the person I contracted with happily signed that Contract including its Waiver of Claims, which I then retained for several years so I wouldn’t get surprise Service of lawsuit by Sheriff at a later date.

Knowing quite a lot about how the law defines Ind. Contractor and Employee, I knew that if I were to tell that person how or when to do his job I might be inadvertently making him/her an employee despite my desire to hire an IC…and this is pretty uniform WC law around the country: if the hiring party attempts to tell (or retains the legal right to direct )the workman how or when (what hours) to do his job or what tools to use or how to use them, then that person becomes an employee under state law despite employer’s intention to NOT hire an employee.

So in my IC Contract I carefully spelled out that I was not, in any way, telling my IC how to do the job, what tools to use or the specific hours he was to do it and that such details were exclusively the province of the IC.

When I practiced law I made more than one recovery for such injured or killed workmen where the employing or hiring company or employer had attempted to make that relationship one of Ind. Contractor and NOT employee…but because the employing party persisted in attempting how and when that person did the work, or in telling the workman what tools to use or how to use them, the workman became, legally, an employee and the state’s WC law had been kicked into force and did cover that injured or killed employee.

Those “employers” may or may not have had WC in force for their employees, but if they didn’t have WC coverage for my client or deceased, they then, under that state’s WC law, lost the right to a number of defenses such as assumed risk, contributory negligence, etc. and that employer then got jammed into a very uncomfortable crack that forced him to pay my client.

*oddly, this exemption doesn’t cover WA State licensed RE Agents who MUST be covered by the hiring WA RE Broker under WA law. The legal theory the WA Supreme Court used to make such law was that since all an agent’s income must come from the RE broker and the REB is the owner of (and legally responsible for) all the RE business in such an Agency in WA, the REB MUST tell his agents how to work.

So could you or I as employer of one or two even get NY WC coverage for those persons?

I’m also interested in your finding a truly knowledgable P&C Agent who knows anything much about WC law, as my experience taught me those people normally knew next to nothing about WC law in ANY state.

By the way, I try to read all your postings as I consider you one of the most knowledgable on this site and I’m always learning something from your postings.

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Re: Deed and CPA’s concerns - Posted by Rich-CA

Posted by Rich-CA on August 07, 2007 at 09:48:08:

Same deal with CO LLCs except the fee is 1/4 what NM asks for.

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Re: Problems with ones’ own ins. policy - Posted by Bob Smith

Posted by Bob Smith on August 06, 2007 at 23:14:47:

FTB, being about the most aggressive tax collector in the country, would almost certainly argue that a foreign LLC leasing property to a California “Operating LLC” (who then subleases to the ultimate tenant) is doing business in California, to wit, leasing property. If the Operating LLC is collecting rent as a property manager then the Owner LLC is definitely doing business in CA, since that makes the Operating LLC a mere agent.

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Does gen. liab. pol have both forms? - Posted by John Merchant

Posted by John Merchant on August 04, 2007 at 19:36:45:

While I know and have had to deal with both liability policy forms (claims made and occurrence) I’m not aware that these variations now exist in general liability policies, but they might*.

The only insurance contracts I’ve ever dealt with on same were med. malpractice policies, but today the ins. industry may well be using both in general liability contracts…are they?

*I’ve been out of general law practice for some years so I’m not current on P&C policies and variations today.

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Re: Problems with ones’ own ins. policy - Posted by Frank Chin

Posted by Frank Chin on August 04, 2007 at 16:24:21:

Bob:

I don’t know if John gave the best example for the insurance denying an untimely filing, and denial of a claim, as well as just defending the claim without eventually paying it.

But something like this actually happened to me.

I had a “slip and fall” accident, perpetrated by a fraudster. He came to my office a day or two after the alleged incident, showed me photos of his black abd blue face, and told me we don’t have to make a big deal of it, he’ll be happy if I just pay for his doctor’s visit. I thought I can keep my insurance company out of the picture to keep my rates down, so paying a hundred or so for a doctor visit is a good deal.

Then, three months later, he came by with a chiropractor’s bill of $3,500, where he made a visit to the doctor every other day. At this point, I notified the insurance company.

The insurance company sent me a copy of the fine print of the policy where I had to notify them within 30 days of the incident’s occurence, and having failed that, they said, all the can do is handle the claim but “may not” be paying the claim when or if it’s settled.

The good news is having the insurance company in the picture is in itself a good deterrent. The fraudster had trouble finding lawyers to handle his case for a measely $3,500. He was complaining to me for the longest time that his lawyer was haggling with the insurance company, and finally was told, the new "claims rep couldn’t find the file.

Then, a few month’s later, he came by to ask for my help. He said his lawyer lost his file, and feigned “not recalling the case” in a recent conversation. He asked me to do him a big favor if I can dig up contacts from my files, claim number etc., so he can help his attorney get things back on track.

Some people have nerve!! I just smiled and said “I’ll see what I can do”.

He came by a few days later and I apologized saying I lost my files on it too.

Anyway, I knew he was a fraudster since we overheard him telling another customer about other scames he pulled. Fortuantley, for me, some scamsters do it for small amounts hoping the business or insurance company would settle to get them out of our hair. Unfortunately for him, we were a step of hom each step of the way.

But getting back to John’s point, if the “slip and fall” resulted in a $1,000,000 claim, the insurance company can also say “we’ll handle and defend the claim, but you may have to eventually pay the damages out of your own pockets, since you didn’t report the incident within 30 days”.

Frank Chin

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Additonal Info: - Posted by Frank Chin

Posted by Frank Chin on August 04, 2007 at 08:48:34:

John:

Here’s a link for NY State that answers the WC questions you raised:

http://www.wcb.state.ny.us/content/main/Small_Business/employer_handbook.pdf

Read the part, beginning on the bottom of page 7, pertaining to who is covered, and who is excluded. Sole proprietors, partners, corporate officers can “elect” to have coverage, though they are exempt.

The other issue I see is “aggressive” health care providers, and hospitals losing money and broke. An injured workman working at the rental would be asked if they don’t have health coverage “did you hurt yourself at home or at work”??

If he fell off the roof of my rental while working on it, “what would he say”?? And of course, the next question is “who were you doing the work for”.

Indeed, when we had the accident, the hospitals and doctors approached me directly, when told my workers were injured at work, even while the workers were at the hospital, and before I even filed a WC claim, and only stopped bothering me when I finally provided them with a WC claim number and the name of the claim rep.

So I can see my first contact if “someone falls off the roof” of my rental, is seriously injured and lives, will not be the worker’s lawyer, but the freindly finance office of the local hospital.

Frank Chin

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Re: Some NY WC questions - Posted by Frank Chin

Posted by Frank Chin on August 03, 2007 at 03:56:01:

John:

I had 8 employees for the firm I had, and under NY law, the “owners” are exempted from mandatory coverage, but can “elect” to buy the coverage. I found no prohibition against an owner of a company working by himself buying coverage, though he is EXEMPTED from having to get it. In fact, I had to sign a form “electing” not to have the coverage. In my research, I found a site, which I unfortantely did not bookmark, that recommeded that owners of busimesses doing work themselves that occasionally hire 1099 contractors to get a policy, “elect” to get themselves covered, so they can then add the coverage for others.

Oddly, in NY State also, exemptions to required WC coverage includes, among others, RE agents, priests, and clergymen.

Currently, I’m discussing this WC issue with my insurance agent, and the technical point centering around what “nominal” compensatiom I have to report for myself to past muster. In my current setup, I pay myself from other entities, and the management company is just a “pass thru emtity”, which collects a management fees from these others, and just pays benefits.

After the accident at my business, I learned that the owners can be held personally liable for WC claims even if the business is incorporated, if they don’t carry WC coverage. Conversely, the employee CANNOT sue the employer of with WC coverage.

I also learned that state law requires insurance companies to include WC coverage for “owner occupied” homes, which is not available for NOO properties. The fact that the state requires WC for OO homes seems to me that there are WC issues for NOO homes as well. I asked if the policy can be enhanced to include WC coverage, but advised it is not available.

This point was important enough for me to verify that my agent contacted the insurance comapany, and confirmed back to me last week that I have WC coverage for my home, but not for the rentals.

I also learned in the course of the accident in the business, that although state law “prohibits” suing the employer with WC claims, lawyers will go ahead and sue “everyone else but the employer”.

Indeed, the one employee who was the most seriously injured, and under WC did come back and sued my landlord for “negligient management” of the property. And because my company assumed maintnenace responsibilities under the NNN lease, my company was pulled in anyway, despite the ban against suing the employer.

So the GAP I see in the strategy of relying “heavily” on LLC"s to protect against risk lies in someome suing under WC grounds, where:

  • I am not covered under my"general liability" insurance.
  • State law allows suits against owners of companies.

In fact, for these legal reasons, I can see someone seriously hurt suing on WC grounds, especially if the property is held in an LLC.

My main concern is the few people I used, especially roof repairs, are often not well equipped, thus using tools and ladders which I provide, strenghthening the argumanet they are employess. In fact, I provide the ladder, roof tar, amd the trowels.

So far, I have not had any handyman sign forms saying they’re strictly independent contractors. But if this is another good approach, I’ll check with a local attorney and have something prepared.

In fact, if I can work soemthing out where I can legally pin these people down as “independent contractors”, it seems simpler amd cheaper than going the WC route.

Frank Chin

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Re: Problems with ones’ own ins. policy - Posted by Rich-CA

Posted by Rich-CA on August 07, 2007 at 09:51:28:

That’s not a supportable position and the court cases have gone against that interpretation (remember the unitary tax?). Ownership is ownership and business is business. Anything I can own personally can be owned by my LLC or Corp. But transacting business? None of the criteria for that are met whether I personally contract with an LLC (mine or someone else’s) to do the work or am doing it via a proxy such as another LLC.

FTB may be aggressive but they are not stupid. They have to prove the LLC meets the criteria for “doing business”.

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Yes, and his relatives & friends - Posted by John Merchant

Posted by John Merchant on August 05, 2007 at 07:07:23:

Frank

Thanks for NY WC law book. Like all lawyers everywhere I love to be able to pick up a free lawbook legally and add to my home library.

Your point is really true…the injured person is going to be “reminded” to pieces that he may have/probably does have a WC claim

So all of us need to think this through now, before hiring anybody for any kind of job, and deciding how we’re going to handle it when it happens to somebody on one of our projects.

While I choose to keep my relationships in the independent contractor category now, and advise all workmen that they are NOT going to be my employees, and take some pains to put this in writing to them, this may not always be best answer.

BUT again, all of us need to think it throught before an accident or claim might develop, and our own state’s laws on the topic should be looked at now so we can know how we’re going to handle it if & when it happens.

Since all state’s WC laws are pretty much unique, I advise everybody who’s going to be doing any contracting or hiring to get familiar with his/her WC laws beforehand so as to stay out of the soup.

I suppose I’ve lived with it so long that if I were waked out of a sound sleep at 3:00am I’d go on automatic and say “well my lawyer has told me not to discuss anything like this over the phone so send me a letter and one of us will get back to you after I talk with him. Goodbye.”

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Maybe there’s another way … - Posted by Frank Chin

Posted by Frank Chin on August 05, 2007 at 09:56:38:

John:

Throough the years, I favored handyman doing work as a part time job, one being a tenant of mine. a member of the “sheetmetal worker’s union”, and another one, a member of local 3, the electrical worker’s union.

And I’m told, during lean times, the unnions call them up to provide enough work to keep up the retirement, disability, and health benefits. So these guys have insurance card to get into a hospital, so the hospital would not even haasle me.

Better yet, the local 3 guy is a scamster, faking WC claims to be out of work, and then doing handyman jobs, where he does very well. He’s doing less of it now, after a major crackdown, with TV showing video tapes of workers on WC doing roofs, swimmming in Hawaii etc.

Thinking about it, how could someone come after me for a WC claim if he is already out faking a WC claim??

Maybe I already “liabilty proofed” myself.

So instead of picking up an illegal at the Home Depot parking lot to do work, just pick some guy who’s a blue collar union guy working on the side. Better yet, many of these union plans evan carry them into retirement.

Aas a word of caution, one of the guys injured at my company as I learned may not be exactly legal. The WC people (NY State inurance fund) called to say the SS# may not be exactly valid, in which case, they’re not paying the claim. They called me a few times on it, and I insisted it was, sending in a copy of the same SS card each time, and after that, they haven’t bothered me. And so far, I haven’t heard from the hospital either.

Bottomline

Get a union guy or a retired union guy with benefits and stay away from illegals hanging around Home Depost

Frank Chin