This column first appeared in the San Antonio Express News on July 14, 2017.
Dear Mr. Premack: I work for someone else as a contractor and have been on the side buying houses and fixing them up for either resale or rental. My cousin wants to get involved and for us to make it a full business for us both instead of just a side business for me. I want to consider it but what legal documents do we need, before we start to make it work in the long run? I am single and have a Medical Power of Attorney the doctor’s office gave me and also a handwritten Will. Thank you. FM
Congratulations on your business plan. I cannot speak to the viability or profitability of your new venture, but can give you some guidance about business structure, and insight on how to integrate the new business into your estate plan.
Since this business will involve two owners, you could select a traditional corporate format, a traditional Partnership, or a Limited Liability Company as the business structure. Each has its pros and cons. If you want to limit your personal liability, or if you intend to eventually sell shares to raise money from investors (which you must do carefully to avoid violating state and federal laws) then you may want to use the corporate format. If you want to operate with less formality and simpler taxation, you could select the Partnership format. But if you want the best of both, you would select the Limited Liability Company (LLC) format.
An LLC allows the two of you to own the company, to determine how it will be managed, to divide up gains as they are earned, and to avoid personal liability for the company’s troubles. An LLC allows you to avoid double taxation by allowing the company’s gains and losses to be reported on your individual tax returns. An LLC does not need a formal board of directors, has no need of officers, and reduces the need for documented business meetings.
On the liability side, the LCC’s assets are at risk for any debts or judgements against the company. But any assets that you hold personally – like your savings, investments and home – are protected. If, for instance, the LLC was sued over a contractual dispute and found to be liable, any accounts and resources owned by the LLC are at risk. If it owns a few houses that are used as rental properties, they could be lost. But your own resources outside of the LLC would be safe. (This is one reason that some real estate businesses form several LLCs, each owning just one particular property. If there is a liability, then only that single property is at risk of loss. The others are owned by different LLCs, and are thus sheltered.)
You mention that you are single, have a handwritten Will and a Medical POA from your doctor’s office. Question: would you trust someone who has never held a hammer to rehab one of your houses? No. So why do you trust yourself, who has no legal training, to prepare a Will that has an effect over each and every asset you’ve worked hard to acquire? You should work with a professional who will do the work properly.
The Will should be, at least, reviewed by an experienced estate planning attorney. The attorney can help you select the best business format, can help with the legal establishment of the business, and can help you determine what will happened to the new business should you die or become incapacitated. You might consider a Living Trust to own your share of the LLC, and you certainly need a proper financial Durable Power of Attorney. Also, that Medical POA from your doctor is very likely legally inadequate (yes, you’d think a doctor would know about such things – but the Medical POA is a legal issue, not a medical issue, so the doctor has no special expertise in the matter).
Consult with experienced legal counsel on your business formation and on your estate planning. You will be well served in the long-run when you and your assets are protected by well-drafted legal instruments.
Paul Premack is a Certified Elder Law Attorney with offices in San Antonio and Seattle, handling Wills and Trusts, Probate, and Business Entity issues. View past legal columns or submit free questions on legal issues via http://www.TexasEstateandProbate.com or http://www.Premack.com.