A reader asks: “I am a small landlord. I buy houses and rent them. My accountant says I do not need a corporation or limited liability company. He says I should just get more liability insurance for my houses and call it a day. My friends and my investment adviser tell me I should incorporate this business. What do you think?”
To answer this one, I have to tell a story. Years ago, I was the police reporter for a daily newspaper. Every year, I had to interview a member of the city police force and do a story about “ways to keep your home from being burglarized.” One year, I interviewed a grizzled old detective sergeant who had been on the force for 40 years and was getting ready to retire. When I asked him for tips on how to keep burglars at bay, he gave me the following extremely candid answer:
“You know, you really can’t prevent your home from being burglarized. Today’s burglars have highly sophisticated tools that are better than anything we have in the police force, and they can break into just about anyone’s home if they’re motivated enough. What people CAN do is slow the burglar down.
“Like any other professional, a burglar wants to make his job as easy as possible and he doesn’t want to take unnecessary risks. He knows that his chances of getting caught and going to jail double or triple each minute he spends in your house. Once he’s in your house, he has to find the stuff he knows he can sell and get out of your house in 10 minutes or less. If he thinks he’s going to have a tough time doing that, he will stay away from your house.
“So by all means, put double locks on all your doors, put bars on your windows, get yourself a vicious barking dog and clear away all the shrubs around your house so the burglar has no place to hide. If a burglar sees you’ve done all of that, he will see your house as a high risk and he will stay away. Just recognize that anything you do is not 100 percent foolproof. If you’ve got the Mona Lisa in your living room and the burglar knows that, he may be motivated enough to take the risk and try to break through all of your defenses.”
Excellent advice for homeowners, but what does it have to do with the reader’s question? Everything. When you run a business, you cannot ever be 100 percent certain that you won’t be sued, but there are lots of things you can do to make yourself an unattractive target. You can form a corporation or LLC, and make sure your customers and suppliers know that’s what they are dealing with. You can get lots of liability insurance so a disgruntled plaintiff will go after that rather than your house and other personal assets. You can make your customers sign “waivers” in which you disclaim legal responsibility for anything bad that might happen to them. You can deed your house and other important assets over to your spouse, provided your spouse is not involved in your business.
Even if you do all these things, you are not 100 percent judgment-proof. If someone is angry enough, rich enough and spiteful enough to bring a lawsuit just to make your life miserable, you’re in trouble. But most folks (or their lawyers) will look at your defenses, realize that it isn’t worth “throwing good money after bad” to sue you and will go away. They will go away mad, of course, and they may try to hurt you in other ways (such as badmouthing your business to everyone they know), but they probably will not sue you.
So, to answer our reader’s question: As soon as you have the cash to do so, get extra liability insurance, form a corporation or LLC for each house and make sure each lease is signed by the corporation or LLC so the tenants know they are not dealing with you personally. The other thing you can do is to treat your tenants so well, responding to their leaky faucets and plugged drains so promptly, that no one ever thinks to sue you in the first place.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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