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]

Quote from @Tyler Munroe:

From what I'm seeing, it seems to be fine to own/run the management company as long I have contracts in place and corporate veil in tact.

That's my whole reason for doing it, actually, since they are all my rentals I'll be managing.

Am I wrong about this?

This is something we regularly recommend to clients and help them set up.  You keep much more value in this manner (owning the management entity yourself), it offer premier tax mitigation strategies, and can even help move the target from the asset holding entities to the income entity, helping to protect the true value, which is the real estate.  That said, you absolutely need to be careful about not just having agreements in place but giving them teeth - make sure they are signed by each entity (which I know feels a bit schizophrenic, but it's important), make sure the terms are reasonable (especially service fees), and that the terms are followed through on - make the payments each month to fulfill the contract.  This is how you make it bulletproof.  References Drew's comment a bit higher up - this adds liability protection because while an attorney will absolutely throw everything up against a wall to see what sticks, if you keep the corporate veil intact, those lawsuits won't stick to you or your other businesses, because there is no standing or contractual relationship.  Thus, it will be very easy for your lawyer to get those parties dismissed.

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.