When a client owns real estate, whether it be commercial or residential, held for investment and/or for income producing purposes, it is critical that the owner be cognizant of the liability issues involved. Clearly, if a tenant or the tenant’s employees, customers or guests are injured on the premises, the injured party will not only sue the tenant but chances are good that he/she will also sue the owner of the property. While it is imperative that both tenants and landlords have sufficient liability insurance policies in place, it all also makes a great deal of sense to further protect oneself.
If an individual owner of real property is sued, the owner’s personal assets are at risk. The relatively simple way to avoid this is to have the property owned by a corporate entity. An S-corporation is certainly one possibility; however, there are some restrictions with respect to the ownership of these corporations, which restrictions are contained in the laws governing these entities. Often, a better option is forming a limited liability company, which also offers liability protection but does not have these restrictions. While a bit more expensive to form, they offer a great deal more flexibility in terms of ownership and estate planning.
Once the limited liability company is properly formed, the law requires that notice of the formation be published in two newspapers for a period of time. The law also requires a limited liability company to have a membership agreement, which sets forth the rights and duties of the owners, which are known as members, as opposed to corporations where the owners are deemed shareholders. These agreements are also important in that they can and should stipulate what happens when a member wishes to leave the company, dies, or retires. Like shareholder agreements, a well-prepared membership agreement provides a mechanism for these events and thus reduces conflict.
If a client owns more than one parcel of property, it may make sense to form more than one limited liability company, with just one or two properties being owned by one company and another company formed for others. This all depends on the values of the properties. If the company owns several parcels of property and is then sued, then all of the parcels owned by that company are at risk, so caution must be taken here. Of course, both owners and tenants should maintain adequate liability insurance, regardless of the form of ownership.