Questions and Answers for September 2015

As seen on our Message Boards.

Q: Should I set up an LLC for my property?

Asset protection can be described as having two pieces: the castle and the guards. Any would-be assailant first has to evaluate whether to attack the castle, and then has to defeat the guards. Castles are corporate entities like Inc and LLC. Guards are lawyers paid for by an insurance policy. The two have separate but complementary functions.

When you form an LLC or an Inc., you can create a barrier between your assets and a plaintiff. This barrier can mislead a plaintiff into thinking that there isn't much potential payoff in a lawsuit, so they won't take the case. If a lawsuit starts and prevails against you, having an LLC can also prevent separate assets like stocks from being taken.

The barrier created by LLC's and Inc's is not bullet-proof. There are many paperwork requirements to be followed or else all bets are off. Inc's must have annual meetings. LLC's and Inc's must have separate bank accounts from their owners. Any time an owner signs on behalf of the corporation they must make clear that they are signing as an agent of the corporation and not as the owner. Any failure in this realm of paperwork can lead to "piercing the corporate veil" and subjecting all of your assets to the lawsuit.

When you actually get sued, you need to defend yourself in court. This applies whether or not you have a corporate form. As a sole proprietor you can represent yourself. As an LLC or an Inc. you must hire an attorney. It would be best to hire an attorney at least for advice. In either event you want liability insurance to pay for this attorney. Liability insurance can also pay for any judgments against you. With enough insurance, you can defend almost any suit and pay almost any damages.

Some view insurance as the most important thing. In this view, the LLC's role is to book-end by misleading at the outset and firewalling in the worst-case scenario where your assets are being taken. Insurance can do all the heavy lifting in the middle. It can even prevent assets from being taken. So look at LLC's after you assure yourself that you have adequate liability coverage (auto, homeowners, and umbrella). In Massachusetts you also want to make sure you have a homestead declared on your residence.

Q: My tenant is using electricity at twice the amount I used to spend when I lived there. What are my options? The apartment was rented with heat, hot water and electricity included on a verbal agreement.

You should never rent without a written agreement. Members can download rental forms.

With a verbal agreement that electricity would be included, there is no nuance or fine print to impose a limit on usage. The only exception is if your building is more than 600 ft from the nearest power line, in which case you needn't provide electricity (but then who would rent from you? and you can never turn off a service like this after a tenancy has started).

Terminate the tenancy-at-sufferance (verbal tenancy) and offer to create a new tenancy-at-will spelling out what's included and whether overage charges will apply. Note that under the law, you cannot charge this tenant for water ever. (It requires you to find a new tenant to start charging; a new agreement is not enough.)