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Answer to Avvo question on Selection of Business Entity

Answer to Avvo question on Selection of Business Entity

I answered the following question on Avvo.com and thought it might be of interest.

"We live in MD. I have an LLC as a therapist providing services in private office. My husband has a proprioetorship in construction. Together, we started buying houses and renting them. He is fixing house #3. We have been advised to turn his company into an LLC and create another LLC to protect our rental houses. Do we need to have a separated LLC or can we just have it into his LLC. If yes, do I need to enter my name on his LLC as the houses are on both of our names? Also, in getting independent contractors to help with fixing the house, we were told to provide them either workers' comp or liability insurance to cover ourselves while giving them a 1099, in case they don't carry their own. Is that the best way?"

Here was my short answer:

Q. We started buying houses and renting them. He is fixing house #3. We have been advised to turn his company into an LLC and create another LLC to protect our rental houses. Do we need to have a separated LLC or can we just have it into his LLC.

A. I think it may be unwise to give a pat answer to your general question because I do not think you have given all of the information that needs to be considered. There are several angles to think through. Some of these angles include (1) tax questions; (2) how this fits in your estate planning; (3) your plans for the property (re-sell or hold); and (4) whether you are willing to keep up with the formalities of keeping separate accounts, books, etc. for several entities. Also, is your objective to protect the houses from your/your husband's potential creditors (e.g., your husband's construction customers or possible malpractice claims relating your services as a therapist) or to keep any possible claimants who are injured on the property from your/your husband's assets? If the main fear is tort claimants related to the rental property, I recommend investigating an umbrella liability insurance policy. You will be surprised at how inexpensive coverage can be. In choosing a business structure, you will probably want to consider the potential unintended consequences of each structure. That is why I and others recommend that you speak to an attorney.

Q. If yes, do I need to enter my name on his LLC as the houses are on both of our names?
A. Depends on the answers to the previous question. You should be aware that owning property as tenants by the entireties (the most common form when owned by husband and wife) provides powerful protection. Property owned in this form cannot be seized to satisfy your individual liabilities--whether they are business or tort liabilities. That protection would be lost if the property were transferred to an LLC (though the LLC would give you a different kind of protection since the LLC's property belongs to the LLC, not you and your husband).

Q. In getting independent contractors to help with fixing the house, we were told to provide them either workers' comp or liability insurance to cover ourselves while giving them a 1099, in case they don't carry their own. Is that the best way?
A. Workers' compensation insurance protects employers from employees' claims. If they are truly independent contractors, you cannot provide them worker's comp. Whether they are truly "independent" can be a complex question that hinges primarily on who has the right to direct and control the details of the work. If they are not working exclusively for you, decide how to do the work themselves, work their own hours, have their own business location, supply their own tools and supplies, there is a good chance they would be considered indendent. If they are independent, then it would be wise to confirm that you have liability insurance to protect you from potential claims relating to injuries to workers or even your neighbors in connection with work on your premises.