The default for a landlord is a sole proprietorship, where the landlord uses his or her bank accounts for the business and reports business income and loss on schedule C of his or her federal tax return. A judgment creditor can reach the landlord's personal assets, including the landlord's house, to satisfy a judgment. However, it is important to note that there are several exceptions, but that a detailed discussion of the law regarding the creditor – debtor relationship is beyond the scope of this blog post.
By contrast, a landlord who forms a limited liability company is shielded from personal liability for the acts of the corporation, unless the corporation is the landlord's "alter ego." Business income and loss is still reported on schedule C of the landlord's federal tax return, just as if the landlord were operating a sole proprietorship. If there is more than one person involved, those persons can be made members of the limited liability company.
To prove the existence of an "alter ego," a person who sues the landlord would have to prove that the corporation was merely the "alter ego"– and indistinguishable from – the individual landlord. However, a plaintiff may be able to prove the existence of an "alter ego" if the landlord and the corporation share bank accounts, do not maintain corporate records, and otherwise do not take any steps to separate the finances of the corporation from the finances of the landlord. For this reason, I recommend that any landlord who forms a limited liability company take steps to separate the corporation from their personal life.
The chief benefit of forming a limited liability company is the protection from personal liability. In other words, a judgment creditor cannot reach the assets of the individual owner, unless the judgment creditor proves the existence of an "alter ego."
However, owning a limited liability company comes with certain responsibilities. The landlord has to file an annual renewal every year with the secretary of state. Moreover, any major decisions, such as the purchase of a new building, furnace, or other equipment, need to be recorded in writing. In addition, the landlord has to pay a fee to incorporate as a limited liability company.
A landlord who has incorporated as a limited liability company cannot represent himself or herself in District Court, even in an eviction. Rather, the landlord must be represented by an attorney. It is important to note that an officer of the landlord may represent a landlord in conciliation court, but a corporate landlord must be represented by an attorney in District Court.
Given the advantages associated with forming a limited liability company, it is difficult to imagine a scenario where a landlord would not form a limited liability company. However, there are other corporate entities available to a landlord who wishes to incorporate, such as an S Corp. Still, I tend to think that a limited liability company is most appropriate for most people, unless there is a good reason for not forming a limited liability company.
Your needs and whether a limited liability company is right for you depends on your specific situation. You should seek the advice of an attorney before taking action based on this blog post. To that end, I invite landlords to give me a call at 763-450-9494 to discuss their unique situation. I do not typically represent individual tenants, although I will represent corporate tenants on a case-by-case basis.
WARNING: The information contained in this blog post does not constitute legal advice and may not be applicable to your situation. Tim is licensed to practice law only in Minnesota, and the information contained in this blog post may not apply to jurisdictions outside of Minnesota. Further, reading this blog post does not create an attorney-client relationship between you and Baland Law Office, P.L.L.C. You should always discuss your situation with an attorney before taking any action based on what you may read in this blog. To that end, please call (763) 450-9494 to set up an appointment to discuss your situation.