How to organize it all?
You hold a valid brokers license. You want limited liability. You want corporate tax rates. You’re a property manager.
If you setup the business as a sole proprietor, you have unlimited personal liability. This can bite you if there’s a legal problem with a tenant or property owner. The record books of lawsuits often include property managers. Agency always includes vicarious liability.
In addition to the personal liability exposure, all management income is directed to you personally. That means using your SSN for taxes and the bank account.
You might ask what about using an LLC to keep it light and still get protection. In California, the lawyers and legislators prevent any LLC from holding a broker’s license. It seems like the only other option is use the Professional Corporation. But you need to know about the obligations and risks.
Rather than operate as a sole proprietor many companies will choose the Professional Corporation (PC) for property management. Just like physicians, dentals and other licensed professional they may only use the PC to hold their license issued by the DRE.
A professional corporation involves a tremendous amount of paperwork filed with the Secretary of State as well as the Department of Real Estate.
Most people never think twice about using the PC. But there are risks. The biggest is documentation. A corporation cannot think or act by itself. It must document all actions and decisions by the directors, officers and stockholders. If you want the protection given to you corporation by state law you must have written minutes for them, and for each year in business.
The implications of losing the corporate veil include – full personal liability for any judgments, all income and expenses recast to personal tax rates, and the insurance company declines to defend your claim.
Annual reports, meeting minutes, franchise taxes and resident agents are required to remain in compliance. If you get in trouble and try to backdate records, that is worse, fraud. You now have three additional concerns.
- Business Identity Theft – this is the advanced version of personal identity theft. Thieves will take your Secretary of State filing information to create loans, acquire property, etc. Hackers can replace corporate officers online. Real property owned by the corporation is exposed too.
- Corporate Veil Risk – everyone has heard about the potential with civil lawsuits. But did you also know the risk extends to tax audits? Imagine your deductions disallowed and S Corp rates revert to your personal tax return. A large insurance claim is jeopardized if the veil is non-existent.
- Washington DC Legislation – both the House and Senate have pending bills that will require all new corporations nationwide to provide photo identification of stockholders. This adds to your workload and certainly eliminates any semblance of privacy. Criminal penalties and $10,000 fines are proposed.
What to do?
Apply for a DBA – Fictitious Name Statement
Use a Business Trust
This alternative gives you limited liability, insurance protection and corporate tax rates. It has no veil risk. It’s exempt from Secretary of State registration and franchise taxes. You can get a property management business bank account.
It’s known as a Business Trust.
The big issue from state licensing boards is advertising and public safety. Understandably they don’t want unlicensed people operating under false pretenses. So you do the DBA paperwork.
- Broker Licensee – Joe Martinez
- DBA – Modern Management Company
Modern Management Company is a Business Trust.
Although you file DBA in your local county – you still avoid corporation hassles
Why don’t lawyers or attorneys recommend DBA with Business Trust? Two big reasons – first they don’t know how, and second, they can charge you more legal fees with professional corporations.
One solution we found to reduce vicarious liability risk and enhance relations with property owners is to become master tenants. We get authorization to sub-lease the premises. Technically avoids agency.
Now you have a better understanding of the alternative to professional corporations. All the most important elements such as limited liability, corporate tax rates, veil exemption and much more can be had with a Business Trust.