Inside and Outside Liability

To understand the benefits available from the LLC, let’s look at a typical example. John and Mary own an apartment building as tenants-in-common. We know that holding the property, as they do now, exposes them to great danger. Ownership of rental property creates more uncontrolled liability and lawsuit risk than any other business or profession we have seen. And because this potential liability usually cannot be covered by insurance, a single unpredictable event, a mistake, or just bad luck can wipe out everything built up over the years.

Injuries to tenants, problems with lenders, lawsuits from future buyers-all subject everything that John and Mary own to potential liabilities from the property. We call this type of liability-arising from the property itself-inside liability. John and Mary need to be protected from inside liability.

To make matters worse, a lawsuit or claim against John or Mary from a matter not related to the building exposes the equity in the apartment property to seizure in satisfaction of that claim. We call this type of liability outside liability. John and Mary’s interest in the property must be protected from outside liability. If one of them is involved in an auto accident causing serious injury, they do not want to lose the property because of this outside liability. Clearly, owning the apartment building in the current manner is not sound business planning. What other options are available to them?