What Every Residential Landlord Should Know In Pennsylvania

Due Diligence in Screening Prospective Tenants
You should have the prospective tenants fill out a rental application and sign consents so you can request their credit report. Ensure the prospective tenants have stable employment and check their references by calling their current landlord. If the tenant does not have good credit, find out why. If the tenant has a reasonable explanation for not having good credit such as a divorce, get the tenant to have a cosigner who has good credit to sign the lease with them.

Have a Good Residential Lease
The lease is very important and should outline what each party can expect from the other party during the lease term. It should contain rules that the you expect the tenant to follow. The lease should explain what charges are paid by each party such as utilities, landscaping snow removal, etc.

The lease should address late charges and eviction procedures including how long you are required to store the tenant’s belongings that are left behind. The lease should include a clause regarding Act 215 so you can recover back rent through wage garnishment. It should also have the tenant waive the written notice to quit. The lease should require the tenant to pay landlord’s attorney fees if he is evicted. It should address the notice period each party must give to terminate the lease after the first year. The lease should require the tenant to provide pay stubs annually so you can verify their employment.

Security Deposit
I recommend you take pictures of the property before you rent it. Then walk the tenant through the rental property so the tenant can see there is no property damage. Then when the tenants move out if there is damage you can take a picture of the damage and provide the tenant with before and after photos so you can explain why you are taking their security deposit. You should always give your tenants a receipt if they pay the rent or security deposit in cash indicating the date and amount received.

Limiting your Liability
You should deposit the rent in a separate bank account and should have the rental property owned by a Limited Liability Company (LLC). If you do not want to pay the 2% transfer tax to transfer the property in the LLC’s name you should have a $1,000,000 umbrella policy in addition to a $300,000 liability policy on the rental property itself. You should require your tenants to have content coverage insurance so their contents can be replaced if there is a fire or other damage. You should require the tenant to provide you with the insurance policy declarations page on an annual basis.

If you have any questions or need a good lease feel free to call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

Why I Should Form a Family Limited Partnership

Basic Strategy
The estate planning strategy employed by business owners is to gift limited partnership interests to family members at a discount based on their future business succession plan. This works well for succession planning because a business owner that has a successful LLC can gift the nonvoting LLC units to his children and out of his estate over time. The business owner acts as a general partner and his children are limited partners. In addition all the assets transferred to the Family Limited Partnership are protected from business creditors.

Gifting to the Limited Partnership
The general partner (business owner) can gift the limited partnership interests up to the annual exclusion of $13,000 in 2012 without filing a form 709 federal gift tax return. If the business owner wants to gift more than $13,000 per person he has to file a Form 709 return and may use part of his $5.12 million exemption in 2012. However, the value of the limited partnership shares or nonvoting LLC units may be discounted up to 30% due to their lack of marketability since there is no ready or available market to sell those shares on.

Tips on Surviving an IRS Challenge
In order for the Family Limited Partnership to survive a challenge by the Internal Revenue Service the general partner (business owner) must resist the temptation to maintain too much control over the partnership assets. The general partner should not pay personal expenses from the partnership bank account or comingle his personal funds with the partnership funds. The partnership should be operated as a separate entity and hold annual meetings to discuss management issues.

The partnership agreement should be drafted to

  1. avoid potential abuses by the general partner;
  2. address when distributions from the partnership bank account should be made;
  3. state at least three nontax reasons indicating why the partnership was formed such as:
    • To make a profit.
    • To increase the family’s wealth
    • To provide a means whereby family members can become more knowledgeable about the management and preservation of the family’s assets.*

If you have any questions about Family limited partnerships please call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park, PA at 610-521-0604.

*Estate of Turner, TC Memo 2011-209

What Should an LLC Member or Manager Do at Quarterly Meetings?

Businesspeople in conference room

Unlike a corporation, the observance of “corporate formalities” is not an important part of maintaining the shield from liability and other protections and advantages offered by the LLC form of doing business. The term “corporate formalities” normally means holding annual meetings of the members, providing written notice in advance of such meetings, preparing detailed minutes of matters decided upon at such meetings, and so forth. The Pennsylvania Act indicates that failure to observe such corporate formalities shall not be considered a factor tending to establish that the members have personal liability for any debt, obligation, or liability of the LLC where the Certificate of Organization or Operating Agreement of the LLC do not specifically require such formalities to be observed. However, this does not mean that LLC members are completely free to ignore the separate legal identity of the LLC. For example, members must always keep in mind that the LLC assets and funds are owned by the LLC, not by the LLC’s members. Separation of LLC assets from members personal assets is very important. It is also important for the members not to pay personal expenses from the LLC funds or bank accounts.

A. Member Votes. Certain fundamental changes in the life of an LLC, such as a merger or liquidation, require a vote by the members. These fundamental changes include amendment of the Certificate of Organization, amendment of the Operating Agreement, merger or consolidation of the LLC, and winding up and dissolution of the LLC.

B. Manager Action. Matters of general operating policy should be considered and authorized by the general manager or managers of the LLC. Although there is no statutory requirement with respect to how frequently the managers should act, it is advisable that they meet at least quarterly. In addition, a specially convened meeting of the managers may be called if action is required before the next regular meeting. Action by the managers may also be taken by unanimous written consent. The managers can vote without a formal meeting but if a significant matter is being voted on it may prove useful to schedule regular managers’ meetings to address it on a quarterly or at least annual basis.

Matters appropriate for manager action that can be immediately approved by written consent or voted on at a meeting, include the following:

1. Appointment of officers, setting of salaries, and declaration of bonuses (at least annually, typically at a meeting of the managers immediately following the annual meeting of members).
2. Opening or closing of LLC bank accounts and the designation and change of LLC managers and officers authorized as signatories. The signing member should secure a copy of the signature card from the bank and place it in the LLC binder.
3. LLC borrowing or loan agreements and delivery of collateral in connection with such agreements.
4. Consummation of material contracts for the purchase or lease of significant assets or services such as the hiring of a payroll service or the purchase of health insurance.
5. The adoption of 401K or SIMPLE IRA pension plans, profit-sharing plans, bonus, and other employee benefit plans.
6. Amendment of LLC bylaws (if any).
7. Review of financial statements and tax returns of the LLC.
8. Appointment of auditors, if any.
9. Any action that requires a member vote listed in the Operating Agreement.
10. The issuance and sale by the LLC of additional interests in the LLC or the repurchase of LLC units by the LLC or members.

In the case of any such actions listed above, the Managing Member of the LLC should prepare minutes of the meeting and indicate what actions were approved or prepare the form of written consent evidencing any such manager or member actions.

If you have any questions about your LLC feel free to call Gregory J. Spadea of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

What Business Expenses Are Deductible?

If you are self-employed or have an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories broken down as follows:

  • Advertising;
  • Car expense (need business miles plus parking, tolls or actual fuel invoices, insurance, repairs and total miles driven and business miles plus parking and tolls);
  • Fixed Asset – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;
  • W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;
  • Employer share of employment taxes like FICA and FUTA;
  • Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;
  • If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.
  • Insurance but list health insurance separately;
  • Supplies;
  • Materials or Purchase of inventory for resale;
  • Travel, Hotel, Airfare and Car Rental;
  • Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;
  • Telephone including local, long distance, fax and mobile;
  • DSL, cable and internet charges;
  • Postage;
  • Continuing education and business seminars and conferences;
  • Interest expense paid on business loans and provide year end balances;
  • Rent;
  • Utilities like electricity, oil or gas;
  • Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;
  • Prior Year Local Income Tax paid;
  • Total state sales tax paid if you included it in gross sales receipts.

Contact Gregory Spadea at 610-521-0604, if you have any questions or need your tax returns prepared.

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