SUB30kCLUB: tips to protect yourself legally

[Douglas B.]

Today's topic is a springboard off of @Lisa Phillips excellent blog series, episode 2 on incorporating.

We will be doing business in NY and, with the advice of our attorney and accountant, have started an LLC which will act as a legal buffer from law suits. If anyone wants to sue us related to our rental property, they will have to sue the LLC not us personally. Theoretically, that will protect our personal assets.

Another idea people have shared, is to NOT use an LLC but simply to have enough liability insurance on yourself that if you get sued, you'd have the coverage to protect yourself from losing everything. Usually this would be in the form of liability umbrella coverage on your homeowners policy. Personally, I think that's too risky but I know others who do it, have been used and have lived to tell the tale.

I'm also learning more about the option to require tenants to have proof of renters insurance prior to signing the lease. I have been told that this can provide peace of mind for the tenant and has benefit for the landlord too. The tenant is protect in case of theft, fire, etc. Also, there is a liability insurance portion in the policy which will protect the tenant from liability if someone is hurt because of his negligence, for example, while visiting the apartment. That's good news for the tenant AND the landlord. Because now, the injured party has another later of insurance to go after before trying to come after the landlord directly. Also, if the tenant maliciously damages your property in excess of normal wear and tear, the landlord can sue the tenant for damages and the rental insurance would likely pay or settle. I don't have personal experience here but I'd like to know if anyone else does.

I've also learned that business credit cards do not offer the same consumer protection that traditional personal lines of credit do. If someone steals your business credit card and runs up a balance, YOU are on the hook! Yup, it's true. Check it out. We will be establishing a new personal credit card which will only be used for business. As a normal consumer card, we will still get the personal consumer protection.

I'd also recommend making sure that you are meeting the legal requirements for your business entity in your state. For example, if you need to have an operating agreement or partnership agreement, regular meeting with recorded minutes, etc., having all your paperwork in good order will help to prove in court that you are running your business AS a business, not just a sham legal covering. It's a matter of legitimacy.

Another issue is one of PIERCING THE CORPORATE VEIL, which Lisa Phillips discusses in her blog. She explains that in some states, single party LLCs are vulnerable when compared to multiparty entities. She recommends learning about the laws in your state and adding members to your LLC if needed to protect yourself. You can do this and still retain control of the LLC. It's more of a paperwork issue than it is about having contributing partners. It might be good to look into if you're flying solo. Renee and I are partners so that seem like it'll protect us.

Any other ideas you have, please share them with the group! How do YOU structure your business so that you are maximally protected against frivolous suits?

[Sharon Tzib]

LLC's are turning out to be more and more irrelevant in the landlording business, as far as I'm concerned. The reasons for having them when they first came into "fashion" about ten years ago were:

1. Protect your assets from a law suit.

2. Hide your identity from a tenant, making them less likely to sue you.

3. More tax write offs.

Well, unless you have a very high net worth, you can accomplish #1 by having an umbrella policy, as noted above. These are very inexpensive to get, much more so compared to the cost of setting up an LLC, maintaining it, and filing taxes for it, which your CPA charges you extra for. Also, I'm not so worried about protecting my assets from creditors as a landlord, because I pay all my bills. If there ever came a time where I couldn't, I would certainly understand if the creditor wanted to come after me, but more than likely, I would take the bull by the horns and explain to them my situation and work something out (that's the former business owner in me that spent way too many hours chasing down deadbeat clients).

For #2, you can accomplish the same by getting a DBA. Again, much cheaper but achieves the same desired effect. And with your DBA, you can open a bank account to keep your rental business expenditures separate, which makes tax time much easier.

For #3, this turned out to be untrue. According to Amanda Han, BP blogger and podcast guest, an LLC affords you no more write offs than you can get as an individual. I have been finding this to be true the last few years.

The only time I think an LLC is still very prudent would be in partnership situations. Just my 2 cents, but I'm not worried about not having my rentals in a LLC any more, unlike ten years ago when entity attorneys made me believe I was putting my financial life at risk if I didn't.