All Forum Posts by: 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.

Generally speaking, if a creditor is allowed to take possession of the shares of stock, they can sell those shares (which is worthless in a private corporation); however, there may be a requirement to sell the shares back to the corporation, etc.... Shareholders have no authority to liquidate a corporation. Shareholders can only vote for members of the board of directors. Therefore, if a creditor has enough shares of stock, the creditor could vote in new board members, the new board members could choose to liquidate corporate assets AND/OR appoint new officers. New officers could liquidate corporate assets: this depends on who has the power to take what actions in the corporation.

Being wealthy (and having enough assets that are worthy of jumping through large hoops to protect) does not necessarily mean owning lots of things. In fact, own as little as you can (personally) and control as much as you can. Control is what gets you the cash flow/wealth.

Because you cannot always control your ownership of shares of stock as readily as you can control your membership interest in an LLC - yes, this is a big reason why an LLC is better for purposes of asset protection.

If your contract with the PM states he needs your approval before making a repair over $100 - AND he has done that, he has violated your agreement. Since he has violated your agreement, you can likely terminate him for the violation.

HOWEVER, this depends on whether "for cause" is defined in the agreement, and if it is defined, how is it defined. If "for cause" is not defined, I would suggest that his violation of the agreement by not getting your approval is definitely cause for termination. If "for cause" is defined, then I cannot say more without knowing details.

BE WARNED - People will sue whether they should win or not. The PM can sue you no matter what the agreement says, but that doesn't mean he'll win. But, like Rob said - $500 isn't much to sue on unless he is confident he can represent himself in the matter - hiring an attorney to sue you will most likely cost more than $500 unless he is friends or family with an attorney who is willing to do it for nothing (or close to it).

Own property in an LLC. Use a separate business entity (LLC or Corporation) to manage the property. Have a very specific management contract between the LLC that owns the property and the business entity that manages the property. Do not be the person who does the day to day management of the property management company (of course this requires enough properties and cash flow for both companies to be viable....)

LLC is better for limiting liability (hence the name Limited Liability Company) - HOWEVER - NO BUSINESS ENTITY will limit your liability if you personally are the one who is negligent/grossly negligent, etc... and your action or failure to act is the basis for a lawsuit where judgment is awarded to the plaintiff.

If you have enough business to use the LLC owner and Corporation manager - this gives you the best of both worlds: better protection against liability and better tax savings through the corporation.

The best structure is more complicated, but hopefully this gives a decent summary....

Semper Fidelis!

Just to put some of the pieces together....

Short Answer:
There is no difference in taxation of an LLC or a Corporation electing to be taxed under Subchapter S. However, LLCs have much more protection from liability than do Corporations.

Long Answer:
States (normally) only recognize Corporations. States do not distinguish between S Corporations and C Corporations. Only the IRS distinguishes between S Corporations and C Corporations. The name S Corporation comes from the tax laws governing how an S Corporation is taxed: Internal Revenue Code, Subtitle A, Chapter 1, SUBCHAPTER S. The name C Corporation is used only to distinguish one taxable entity from another taxable entity (there is no Subchapter C, which governs how a C Corporation is taxed.)

Because the "S" simply refers to a section of the tax code, choosing to tax an LLC as an S Corporation affect ONLY the rules used to tax the LLC - NOT the rules to form or operate an LLC, nor the rules that determine the liability of the owners of an LLC.

LEGAL REQUIREMENTS & LIABILITY
Legal Requirements:
The rules to form and operate a Corporation are different from the rules to form and operate an LLC. These rules are created by the states. The rules to form and operate an LLC are less strict, less formal, and more flexible than the rules to form and operate a Corporation.

Liability:
LLCs offer much more protection against liability than do Corporations. There are two ways liability can be a problem: 1) the owner of a business entity may have to pay the debts of the business entity; or, 2) the business entity may have to pay the debts of the owner of the business entity.

Business entity owes money:
Corporations - shareholders cannot be made to give up their shares of stock if a Corporation owes money. Shareholders cannot be made to pay money to creditors simply because they own shares of stock. Shareholders can lose all of their investment in the Corporation (Corporation assets are seized and sold off causing the Corporation to go out of business, which renders the stock worthless.)

LLC - Members cannot be made to give up their ownership interest in the LLC. Members cannot be made to invest more money into an LLC to pay creditors. Members can lose the LLC if the LLC becomes worthless because creditors seize assets and sell them off, causing the LLC to go out of business.

Individual owes money:
Corporation - a Corporation cannot be made to pay the debts of individual shareholders. A shareholder who owes money to a creditor can be forced to turn over their shares of stock to satisfy the debt.

LLC - a Member of an LLC cannot be forced to turn over ownership of the LLC to satisfy debts to creditors. An LLC cannot be forced to satisfy the debt of an individual Member. However, if an LLC is going to pay money to the Member who owes a debt, a court can prohibit the LLC from giving the money to the Member and can instead make the LLC turn over the money to the creditor (this is a charging order). By the way, courts cannot require LLCs to make a distribution (pay money) to a Member, it can only say if you are going to pay money to a Member you have to turn it over instead.

As long as this post is, it really is just a summary....

You can indeed get a warranty deed without having to purchase title insurance. The two have come to be linked together, but a warranty deed simply means the grantor warrants title - there is no requirement to get title insurance....

Exactly right. Let's step back a second and think about this. A Warranty Deed means the person who is granting the deed warrants (or guarantees) the title is free from defects and if a defect is discovered, the grantor of the warranty deed guarantees that they will defend the title against any defects.

While this is great, how the heck are you going to find the grantor a year after you bought the property, let alone 10 years later?

So how do we resolve the matter? Use a 3rd party to guarantee the title. The 3rd party will be easy to find; and, the 3rd party will be more likely to have funds to actually defend the title. After all, just because someone says they can guarantee clear title doesn't really mean they will be able to defend the title if something happens. Therefore, just like everything else in life when you want to avoid a lawsuit - you buy insurance and hope/pray it covers you so you don't have to pay out of pocket (e.g., you buy car insurance for this reason, you buy liability insurance on your home for this reason, etc....) But, just because you buy insurance doesn't mean it really will pay out when you most need it to.

While written would be better. Verbal is good enough - just confirm with the other tenants that he is in fact gone.

As long as both options are allowed by FL law and the lease, whichever one you go with is up to you - whichever you think makes most sense.