by Richard Keyt, Phoenix & Tucson Limited Liability Company Attorney
The primary reason people create a limited liability company is to protect the owner(s) of a business or investment real estate from liabilities that arise from the activities of the business or real estate. If a person owns a business without the shield of an LLC, corporation or limited partnership, the business owner is one hundred percent liable for every thing that goes wrong and all of the owner’s assets are at risk and could be lost. The same is true with respect to the person who owns rental property, commercial property or even unimproved land.
In this day and age people sue at the drop of a hat. Consider the case where a boy who climbed a tree on vacant land and was injured when he fell. The boy’s parents sued the land owner for more than the land owner was worth. It is impossible to predict how liability might arise, but we know for a fact that if you own the business or real estate yourself rather than through an LLC, corporation or limited partnership, you and your life savings will be responsible for all the debts and liabilities of the business or the land.
How to Protect Yourself When You Have a Business or Own Investment Real Estate
If you own a business or investment real estate you must form a limited liability company and have it own and operate the business or own the land. The general rule of Arizona LLC law is that the owners of an Arizona LLC are not liable for the debts or obligations of the company. Arizona Revised Statutes Section 29-651 states:
. . . a member, manager, employee, officer or agent of a limited liability company is not liable, solely by reason of being a member, manager, employee, officer or agent, for the debts, obligations and liabilities of the limited liability company whether arising in contract or tort, under a judgment, decree or order of a court or otherwise.”
This general rule is the primary reason you always want an LLC to own your business or investment real estate. If a debt or liability arises from the activity of the business or the land, then the defendant in the lawsuit will be the owner of the business or the land, i.e., the LLC.
The Family Car or Business Vehicle – a High Risk Asset
One of the most risky assets people and businesses own is the car, truck or vehicle. Accidents happen. If your vehicle is being driven by somebody other than you and the driver causes an accident that kills or injures somebody, you will be sued and your life savings will be at risk. Of course your first defense is a comprehensive vehicle insurance policy. Buy as much insurance coverage as you can reasonably afford, including a large umbrella coverage amount.
Unfortunately, no matter how much insurance you have, a jury can award the plaintiff more money that the amount of your insurance policy. If that were to happen, your life savings will be safe only if you planned ahead and created an LLC that owned the vehicle at the time of the accident. If an accident occurs when the vehicle is owned by an LLC, the defendant in the lawsuit will be the owner of the vehicle – the LLC.
If any of the following situations applies to you and the car, truck or vehicle you or your business owns, you should form an LLC and transfer title to the vehicle to the LLC for asset protection:
- You have one or more children (of any age), family members or third parties who you allow to drive your vehicle.
- You own a vehicle that is used in your business. You don’t want your business to be sued because you cause an accident while driving the vehicle for business purposes.
- Your business owns a vehicle. The business (hopefully it is an LLC) should form a subsidiary LLC (100% owned by the business) and transfer title to the vehicles to the subsidiary LLC.
Remove toxic high risk assets such as vehicles from your personal ownership. Put toxic assets into an LLC and take advantage of the asset protection provided by Arizona Revised Statutes Section 29-651.
Caveat 1. If you do form a vehicle LLC to own one or more vehicles, you must make sure that the LLC is adequately insured. When the LLC becomes the owner of a vehicle, you must contact your automobile insurer and purchase the insurance coverage and policy amounts that are appropriate for your situation. The LLC must be named as the insured on the insurance policy and you should also be a named insured if you drive the vehicle. The failure to purchase and maintain adequate insurance could cause a court to pierce the company veil and hold the owner(s) of the LLC liable for the LLC’s debts and liabilities if the company is sued by a plaintiff who brings a claim arising from a vehicle accident.
Caveat 2. If you and your spouse are the only drivers of your vehicle and it is never used for business purposes, the vehicle LLC will not provide any asset protection for the person who is driving the vehicle.