Monday, June 16, 2008

Happy Birthday Dear LLC!

The LLC turned 20 recently, and Larry Ribstein has a first-rate post on the topic. My thoughts on his thoughts are:

1. The series LLC may not be arcane, technically speaking, but I don't think it is the kind of product I would be advising the average dirt client to get into in order to save money. I'm concerned about lenders balking at dealing with them, and there is utterly no case law on veil piercing. I've been telling my clients to stay away from this vehicle, at least for now.

2. Larry also writes:

Finally, there was some discussion in the last panel session about the future of LLCs. The big question is whether abuses of the LLC form might kill the goose that has been laying the golden eggs of flexibility for 20 years. I have expressed my own concerns about abuse of the LLC (see my paper on Reverse Limited Liability).
Great point. LLCs do get abused. There was also a good article I read over the weekend by Lin Hanson (whom I mentioned here the other day) titled "Don't Use an LLC for Asset Protection." Since the title pretty much says it all, I am not going to quote Lin's article at length. It is in the ISBA Journal, a publication in a password-protected area of the Illinois State Bar Association website. I am not sure I agree entirely with Lin's conclusions (maybe because they scare me, not because the logic is faulty), but I am concerned enough about his thesis to run this by my partner, the corporate guru, and get his thoughts.

2 comments:

BawldGuy Talking said...

Thank you so much for this post.

I've been telling real estate investors they're spending way too much money, for a whole lot of false security.

Want protection? The umbrella insurance policy is the cheapest, most reliable way to go, based upon advise I've received from more than one real estate attorney.

In CA it costs $800/yr just to have an LLC. It costs about $2-4,000 for something not found on the shelf at LLC's R US vs a few hundred bucks a year for millions in insurance.

David Stejkowski said...

Very true, Jeff. When I use LLCs there are often multiple levels of protections because a property is part of a REIT or other investment fund. Additionally, lenders (especially conduit lenders) want single purpose entities with special "bells and whistles".

If on any deal you start hearing terms you've never heard before such as "substantive nonconsolidation opinion," "independent managers" and "Delaware single member LLC opinions", then (a) congratulate yourself for landing such a big deal, (b) get a first rate lawyer on your side, and (c) prepare for a very large legal bill.

 
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