Holding property in LLC/Corp

[Elio Mariani]

I plan to buy a rental property with cash from personal assets (stock market) and I plan to have the title held in an s-corp, for liability protection. Is there liability protection value in having the s-corp borrow money from me for the purchase?

Assuming the s-corp buys the property for $250k, then the s-corp would have the $250k property as an asset and no liability. If sued, the s-corp risks losing the property. If the s-corp secures a loan from me for the purchase, would it limit the exposure if sued? Would $250k in assets be offset by a $250k loan... giving s-corp $0 on the balance sheet?

Thanks!

[Keith Barton]

Dave and Mitch:

I could be wrong, but it seems to me you may be misunderstanding each other. Let me offer a few comments to (hopefully) tie the pieces together.

Scenario 1:
You are sole proprietor.
You own rental property.
You hire a maintenance person (not a 3rd party service provider, but someone who works directly for you) to maintain rental property.
Maintenance person is negligent when repairing furnace, which causes furnace to catch fire.
Tenant dies in the fire.

Possible Result:
Lawsuit
Plaintiff = tenant's family/estate.
Defendant = maintenance person.
Defendant = you.
Cross-Claimant = you.
Defendant in Crossclaim = maintenance person (you sue maintenance person claiming any judgment against you is ultimately maintenance person’s responsibility. Maintenance person liable to you for damages assessed against you.)

Liability to original claim = maintenance person - negligent act caused fire.
Liability to original claim = you - as owner of property and for employing maintenance person.
ALSO – maintenance person and you are Jointly and Severally Liable.
Liability to crossclaim = maintenance person – negligent act caused damages. Any damages you pay should be reimbursed to you by maintenance person.

Judgment in original claim = maintenance person – owes money to plaintiff for wrongful death and personal property damages.
Judgment in original claim = you – owe money for wrongful death and personal property damages.
Judgment in crossclaim = maintenance person – owes you money to cover real property damage to rental; owes you whatever you pay plaintiff for wrongful death and personal property damage.

Maintenance person has no money. Even though they are supposed to pay – s/he cannot. Because of joint liability, you owe 100% of money. You lose rental property and your personal residence to help satisfy judgment. You can try getting money from maintenance person, but good luck.

Scenario 2:
You own a business entity (doesn't matter what kind).
Your business entity ("BE") owns rental property.
BE hires someone (not a 3rd party service provider, but someone who works directly for your BE) to perform maintenance on the rental property.
The maintenance person does something wrong, which causes the furnace to catch fire.
The tenant dies in the fire.

Possible Result:
Lawsuit
Plaintiff = tenant's family/estate.
Defendant = maintenance person.
Defendant = your BE.
Forget crossclaim for now.

Liability = maintenance person - negligent act was direct cause of fire.
Liability = BE - BE employed negligent maintenance person.
YOU – no liability: You did not perform negligent work on furnace. You did not employ maintenance person (your BE did).
Joint & Several Liability = maintenance person and BE are 100% liable.

Damages = maintenance person for wrongful death and damage to personal property.
Damages = BE for employing negligent maintenance person.

Maintenance person cannot pay judgment. BE owes 100% of damages. BE must sell property/all assets to pay judgment.

Scenario 3:
You own BE.
BE owns rental property.
YOU perform maintenance on rental property.
You are negligent in maintenance, which causes furnace to burn rental property.
Tenant dies in fire.

Possible Result:
Lawsuit
Plaintiff = tenant’s family/estate.
Defendant = BE
Defendant = You.

Liability = You for negligent maintenance.
Liability = BE for employing you.

Damages = you for wrongful death and personal property damage.
Damages = BE for wrongful death and personal property damage.
Joint & Several Liability = you both are responsible for paying.

BE must sell property to pay damages. You must sell your residence to pay damages.
You are not protected against liability because you in your individual capacity were responsible for causing the damages.

Scenario 4:
You own BE1.
You own BE2.
BE1 owns rental property.
BE1 and BE2 have a contract for BE2 to manage rental property BE1 owns.
BE2 hires property manager.
BE2 hires maintenance person (as employee).

Possible outcome:
Lawsuit
Plaintiff = tenant’s family/estate.
Defendant = maintenance person.
Defendant = BE2.

Liability = maintenance person – negligent maintenance.
Liability = BE2 – employing negligent maintenance person.
Joint & Several Liability – BE2 & maintenance person.

Damages = maintenance person – wrongful death and personal property damage.
Damages = BE2 – wrongful death and personal property damage.

Maintenance person can’t pay judgment. BE2 has no assets; therefore, no money to pay damages. BE2 goes out of business. BE1 still owns rental property. You still own your home.

LESSONS:
If you personally are negligent in managing property you will be liable whether you have a business entity or not. This has nothing to do with piercing the corporate veil. You are liable because you were the one who were negligent. You can manage the business entity and not be liable as long as you were not the one who was negligent (and as long as there is no other theory that would attach liability to you [and there are such theories….])

Separate ownership from maintenance and don’t do work yourself and you will be most secure against liability.