Legal Structure Questions

[Jennifer Taylor]

Hi everyone, 

I'm looking for any legal references that can help me answer the following questions and provide guidance as to whether this approach is sound or needs adjustments: 

-What is the entity structure for managing assets and activities of a short/mid-term rental business? We currently have a LLC that owns our existing rental property and we run the short term rental activities through this LLC with its own separate bank account.

-We are closing on a primary residence in a couple of weeks that has a cottage on it that we will begin short/mid term renting upon close. My thought is that we open a new LLC to run all property management activities (for existing rental property and cottage) along with new bank account, etc. for all activities. The existing rental property will continue to be owned by the existing LLC. The cottage property will be held by us personally as it will be located on our primary residence property.

-I will then put in place a lease agreement between ourselves personally to the new property management LLC to lease the cottage and between the ownership entity of the other rental property to the prop management company. We will also have a short/mid term lease agreement put together for renting out these rental properties with an intention to further limit liability.

My overall question is whether this structure is sound or if we should take a different approach to limit liability. Additionally, if we open a LLC to manage our own properties, do I need to hold a broker's license in KY to do this legally? I am a licensed agent in State of CA but have not taken steps to also get it here.

If anyone has experience in this or has a referral to a legal firm who can help with this I'd appreciate it.

Thanks y'all!

Jenny

[Stuart Udis]

@Jennifer Taylor First  answer this: Do you currently operate your properties with all proper permits and licenses? Do you plan to obtain all necessary permits and licenses for future work that’s required? Do you maintain the correct types of insurance and adequate amounts of  insurance? Do you use licensed and insured contractors? Are you listed as additional insured under their policies? Do you require contracts with indemnification language, payment schedules and appropriate warranties?  Do you obtain lien waivers? Are you active or do you have a PM who is actively touring your properties to prevent or eliminate premises liability exposure?  

If the answer to any of these questions is no, not consistently or not well,  you should start by addressing  these operational issues in your business. Too many in your shoes focus all of their time and energy on preparing for the liability event and fail to address the items in their day to day business that can actually prevent liability exposure. Also the investor  who makes a conscientious effort to do these items is in most cases more prepared for when the liability event does occur. 

I also believe your management LLC is overkill if liability protection is the intention. Perhaps it may help with accounting/book keeping but it will not protect against claims. Neither will leasing the cottage to an LLC as an intermediary. If anything you will add additional expenses because you will want general liability and perhaps even E&O insurance for the management LLC. It's also commonly referred to as an Alter Ego in legal jargon and often times actually complicates litigation if a claim arises. There's probably asset protection specialists/firms who will side with your approach but it's not practical and they are just fee collectors.