Choices Choices: S-Corp, C-Corp, SP, GP, LP, LLP, LLC, LMNOP

What a great day yesterday was!  I left work a little early to hit the road toGreen Bay.  I was there speaking to their apartment association (the Apartment Association of Northeast Wisconsin, or AANW).  I was presenting part 1 of the Law and the Landlord class, this is a class offered by the Wisconsin Apartment Association through its educational foundation, Rental Housing Resources.  We had over 50 people in attendance and we had great questions and great dialogue during the class.

I needed that.  Last week marked officially 20 years in this business for me, and after that long with this number of units, people are amazed that I haven’t burnt out.  To be honest, I am amazed.  And, it was hitting me hard the past couple of weeks.  Should I start looking for a different career path?  Should I back down from speaking engagements?  Should I walk away from the Dr. Rent Radio Show?  After getting away from the normal daily routine and immersing myself in something I truly enjoy (yes… what most people hate – public speaking – is something that really helps me re-charge my batteries), I am back and ready to continue on.  A good thing to, the Dr. Rent Radio Show is coming up on an anniversary as well.  The first ever installment of the Dr. Rent Radio Show was broadcast on June 1st, 2005.  That means in a few weeks, it will be 6 years on the air.

Speaking of my weekly radio program, it is Thursday and time to hit the airwaves again.  We will start with some questions that came up over the past week or so.  One question I am borrowing from a friend’s blog.  Attorney Tristan Pettit of Milwaukee in his blog (http://petriestocking.com/blog/) addressed the question if a landlord has to have charges against the deposit back to the tenant within 21 days, does that also mean that they have to have the repairs associated with those charges done within those same 21 days?  We are going to briefly discuss a two part question I got that I really didn’t know the answer to, and I am in the process of researching it.  If a landlord does a repair that is ultimately the tenant’s responsibility to pay, how long can the landlord wait from the completion of the repairs to actually bill the tenant?  And as a follow up, can these bills be deducted from the deposit?  Finally, we will answer the question of if a tenant wants to pursue double damages against a landlord because of a security deposit issue, how exactly does this doubling thing work?

Since we covered in depth security deposits a few weeks ago, for tonight’s main topic, we are going to discuss earnest moneys and credit check fees.

Last week we had a question that again, had no really good answer.  A husband and wife living together and both on the lease are being evicted… or are they?  The eviction action was filed against ONLY the husband, the wife was not named in the action.  Only the husband was served, and when the Writ was issued, only the husband’s name was on it.  So, when the sheriff goes to remove the husband, do they only remove the husband or do the remove the wife as well?

If this situation happens to you, you are very comfortably in attorney land.  My thoughts on this issue were that if the husband was the only one on the lease, then yes – the sheriff should remove the husband and anyone else that the husband has been allowing to be there.  On the other hand, if both parties are on the agreement, but only one of those parties are actually evicted, then only the evicted party must go, the other party should be able to stay.  It turns out that there are some statutes that actually agree with me.  However, the language on the Writ itself issued by the court says the Sheriff removes everyone.  This makes the entire situation confusing.  Afterall, one of the provisions added into WI SS 704.16 (the law to protect victims of domestic violence in rental properties) allows a landlord to evict an abuser while allowing the victim to remain.  In essence, it allows the landlord to evict one person while letting the other stay.  If you want to evict both, and both parties are on the lease, you must serve both.  Basically, if you are tenant and find yourself in this situation, contacting an attorney well versed in Landlord-Tenant law would be a really really good idea.

We then had two main topics.  One was corporate structures and what is the best way to hold the rental property you might own.  Well… the “best” way depends on your personal circumstances.  What might be best for one person may be a really bad idea for someone else.  Here, the advice of not only an attorney, but also a tax professional will come in handy.  There are a number of ways to own properties, each one with pros and cons.

You could own the property individually, which is known as being a sole proprietor.  This is easy to do, there is no legal paperwork involved.  Come tax time, you just file a separate schedule on your taxes that breaks down your rental property income.  The downside to this simplicity is risk exposure.  If something would happen with your rental property where you might be sued by your tenant (as an example, the child of the tenant became lead poisoned because of an unsafe lead-based paint hazard in your rental – I chose that example because it is something that is NOT covered by insurance), you are personally liable.  Not only is your rental property at risk, all of your personal assets (home, other properties, cars, investment accounts, etc) are also at risk.

Very similar to this would be a partnership where two or more people own the property together.  There is some legal paperwork involved as it is highly advisable that the partnership agreement be in writing.  Although the partnership itself doesn’t pay taxes, it must file its own separate tax return.  The profits from the partnership are then divided among the partners, and the partners record their share of the income as a separate form on their individual returns.  It is hard for me to find real benefits of a partnership, other than it is a little bit easier to form than a corporation of some kind, but only a very little bit.  The liability exposure that exists that when you own the property as an individual is no different under a partnership.  In fact, it might be a little bit worse.  Because partners are jointly and severally liable (just like your tenants are if they signed the lease together), both partners are liable for actions of the partnership.  In the case of a proprietorship, if you do something wrong, you can be held personally liable and all of your personal assets could potentially be at risk.  With a partnership, the same is true.  However, the same is true if it was actually not you but your partner that caused the situation.  So, not only could you put your personal assets at risk from your actions, the actions of any of your partners could also put your stuff at risk.

There are ways to form a partnership that would limit the liability of at least some of the partners.  There are different types of partnerships including limited partnerships (LP’s) and limited liability partnerships (LLP’s).  However, now we are getting into some pretty advanced issues where again, you should talk with someone who understands both these structures and your individual situation.

The third option is a corporation.  Thirty years ago, this was not a very popular option.  Although it did give the owner of the property liability protection (you could only sue the corporation and your personal liability would be limited to what you had invested into the company), it had so many con’s, it was almost not worth it.  First off all, the corporation not only filed its own taxes, it also paid its own taxes.  So, you needed a lawyer to help you create it, and then a tax accountant as well.  Also, corporations were subject to double-taxation.  The corporation would pay taxes on any profit it earned, but that profit was the property of the corporation.  If you, as the corporation owner, wanted some of that profit, the act of the corporation distributing part of its profits to you is known as paying dividends, and then you as in individual would have to pay taxes on that dividend payment, even though the corporation had already paid taxes on this same money as well.

That corporate structure still exists, but today they are more commonly known as “C” corporations.  Since then, new corporate structures have been created that keep the liability protection, but eliminate the double taxation issue.  Much more common now, is the “S” corporation.  It works much like the old “C” corporations do with its legal structure and filing its own taxes.  However, the corporation itself does not pay any taxes.  Instead, each and every year, all the profit that it reports on its tax forms is transferred to the owners of the corporation, and they have to report that income and pay taxes on it.

The newest player in the game is the Limited Liability Company, or LLC.  Even though the “S” corporation made liability protection much easier, it was still somewhat complicated for the smallest operators.  “S” corporations require that the owner is an employee who is paid an actual W-2 wage.  If you are one person with one rental property, this can be very impractical.  The LLC does not have this requirement.  It basically offers the owner liability protection, all they have to do is run it as its own business.  It does need to file its taxes, but again the payment of the taxes is passed through to the LLC ownership.  It needs to keep its own checking accounts and things like that to ensure the liability protection.  The LLC form of ownership is so easy that I know a number of landlords that not only hold their properties in an LLC, but they have created a number of LLC’s so that each individual property is its own corporate entity, and if something bad happens with one property, not only does it not affect the owner’s personal assets, it also will not impact any other rental properties in the portfolio.

Believe it or not, in my one hour Dr. Rent show, I was able to discuss this topic AND spend a good part of the show talking about pets in rental properties.  We talked about the pro’s and con’s of – if you are going to allow pets – of charging a pet rent each month, a refundable pet security deposit, or a non-refundable one-time pet fee.  However, I think that this blog post is long enough already and this weekend or early next week, I will share my thoughts on that issue.

Don’t forget, the Dr. Rent Radio Show can be heard most Thursdays from 5 PM to 6 PM on WNRB-LP, 93.3 FM in the Wausauarea, or online at www.wausauhmong.org (click on the radio link on the top left corner of the home page).  Also, it may be possible there will be no Dr. Rent show next week, May 19th.  I have someplace I need to be at 5.  However, since most shows are pre-recorded, all I need to do is find someone willing to put the show in and press play.  I will keep you informed.

Until then… HAPPY RENTING!

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About drrent

Wausau, Wisconsin Landlord, past president of the Wisconsin Apartment Association, Host of the Dr Rent Radio Show on WNRB-LP, 93.3 FM, Wausau, WI
This entry was posted in Domestic Violence, Education, Evictions, Pets, Questions, WAA, WNRB and tagged , , , , . Bookmark the permalink.

1 Response to Choices Choices: S-Corp, C-Corp, SP, GP, LP, LLP, LLC, LMNOP

  1. drrent says:

    Actually, I must be more burnt out than I thought… I started in May 1993, which means I am celebrating 18 years in the rental business… not 20.

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