“The basic rule in asset protection for owning rental properties is to separate the ownership of the properties from the business of managing the properties. The property management company (which faces the majority of the liability) should be kept as lean as possible while the actual ownership of the properties is kept in separate legal entities.
Many large hotel chains serve as a good example. As you arrive at a large hotel, you may notice two plaques on the wall. One plaque states who owns the hotel; the other tells who manages the hotel. What ties these two companies together is a well-worded lease and/or management agreement which is basically a big finger pointing at the management company saying, “It’s your fault!” If anything bad happens in the hotel, be it electrical, plumbing, slips and falls. sexual harassment, employment disputes, etc. clearly the “operating” management company is at fault. However, the management company owns very little; perhaps the little bottles of shampoo, the supplies at the front desk, and the toilet paper, but most likely not the land, the building, or the restaurant equipment.
Most residential landlords are on a much smaller scale, bur the principles are the same. A property manager or management company runs the properties; a separate entity (such as a Limited Partnership) owns the properties, and a well-worded, carefully-drafted lease and/or management agreement ties them both together. Should the property management company get sued, the liability insurance would usually be the only attractive remedy to satisfy the injured party. Should the operating business go insolvent or bankrupt, the assets (the land and building) would be in a separate legal entity that could then be leased to a new business, even a newly created leasing/management company.”
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