Property Management as Liability Protection

[Tyler Munroe]

Hi BP - 

I wanted to ask the community if any investors use management companies as a form of liability protection? I self manage 14 units and am considering starting a separate property management company as an additional liability shield from tenant lawsuits. It seems as long as I follow corporate guidelines in terms of banking and not piercing the veil, the property management company can provide an extra layer of protection since it's a separate LLC with it's own liability insurance. I've researched the rules to put this into action, but wanted to reach out to the community and see if other investors are employing this strategy? If so, what are the pros/cons to this approach?

Thanks!

Tyler

[Jason Zundel]

Tyler: This is a great strategy, and one we often recommend to clients, both from a tax and an asset protection standpoint. I will emphasize the importance of keeping the corporate veil intact - money flow between entities and individuals should always follow two rules: 1) be based on an ownership relationship (i.e. contribution form the owner or distribution to the owner directly); or 2) be based on a written contract with consideration. This second one is going to be really important here, as your property management LLC needs to have a good agreement between the LLC and the owner of the property (hopefully that's a fully separate LLC the incorporates anonymity for maximum protection!). The service fee should be reasonable, but the other terms can be fairly flexible to give you the most leeway. One final note, the LLC you set up for management should usually be formed and registered in the state where it is offering services or paying a salary, if applicable.


Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.