After a business falters, its legal obligations live on – but your personal assets can be protected.

Dianne Fernanadez, Keva Juice, Vacaville, Calif.
My son and I opened a small smoothie business two years ago. We did great until the economy fell. We opened it under an LLC, and he has since bought me out. Now, he has to take money out of his personal account to support it every month. He just got a rent reduction of $600 a month, but that won’t be enough. He has it for sale and has a possible offer coming through. If that falls through he is planning to close the doors. He is afraid the landlord will go after his house. I have lost my home and have nothing left, so I’m not too worried about losing my property.

What is the best way to go about getting out of this? What kind of repercussions are we facing, as we still have three years on the lease? We spent $107,000 on the build-out (new tile floors, bathrooms, etc.) as it was a brand-new complex. The landlord inherits this – does this help? The business has no loans against it as we refinanced our homes and/or paid everything in cash. Please help!

By Shara Rutberg, CNNMoney.com contributing writer
Your son’s assets should be protected by his use of an LLC unless he gave a personal guarantee to the landlord or the court “pierces the company veil” that protects against personal liability, says David Sokolow, a professor at the University of Texas Law School. Courts rarely do that – it's a move typically made against sham companies.

“It’s unlikely that the court would pierce the veil if your son didn’t siphon funds from the firm or use it to perpetrate a fraud on the landlord,” Sokolow says.

The LLC, however, is liable for the remaining three years on the lease. This means the landlord can sue for damages, which would be reduced by any rent he or she gets from a replacement tenant during that time. Additionally, a court may subtract out whatever benefit the landlord receives from the improvements made to the space, though it probably wouldn't deduct the full $107,000.

There’s no real way to get out of a lease unless the landlord’s willing to renegotiate. However, “as long as the lease was signed only by the LLC and not by you or your son individually, your personal assets should be shielded from the landlord’s claims,” Sokolow says.

Hiring an attorney is expensive, but the experts highly recommend it in your case. Unwinding obligations when a business fails is complicated, and having a professional on your side with expertise in the legal details pays off in the long run.

Hit by the slow-down? Gotta get out? What to do when you can't pay.

Gopal, Broomfield, Colo.
Business hasn’t been good recently at my dollar store, due to the shaky economy and high fuel prices. I’m not making enough to even pay the rent this month. If I close, I will have nearly three years still left on my 5-year lease. If I do out of business, must I still pay rent – it’s roughly $5,000 per month – for the remainder of the lease? How can I get out of my lease without running afoul of the law?

By Kathleen Ryan O’Connor, Fortune Small Business contributor
Dear Gopal: First, don't worry about getting in trouble with the law in the criminal sense – defaulting on or walking away from a commercial lease would be a civil matter. However, you could still face some stiff penalties, so before doing anything, grab your lease and a magnifying glass and start reading the fine print.

In a perfect world, you would have negotiated a sublet or assignment clause into your lease before signing it. This would allow another tenant to come in and take over the remainder of your lease, or some portion of the space. That would not necessarily mean you weren’t still legally obligated, but you wouldn’t be on the hook for the full $5,000 every month, which is the goal here.

But even if you don't have that clause in your lease, don’t be shy about asking for permission to sublet after the fact. Truth is, the landlord knows you can just move out in the dead of night anyway. Plus, in most states he or she is required to mitigate damages by at least trying to find someone to take your place to reduce the payment load you have.

Another option that might already be in your lease is an early termination clause. That would allow you, with far fewer penalties (say one year's rent, or some other lump sum) to get out of the remaining years of the lease free and clear, says Peter Sarasek, partner and head of the national real estate group for the Chicago office of Quarles & Brady.

If none of the above works, there are other options, but all carry the possibility of litigation, Sarasek says.

"Stop paying rent and move out,” Sarasek says. “People do that.”

If you are lucky, it might be a nice location and easy to re-rent. Say the remaining rent under your lease is $1,000 per month and the new landlord rents for $1,500 per month and incurs $400 in new costs; his net is $1,100, or $100 more than he had from you, Sarasek says, so “he really hasn’t suffered any damages.” If that’s not the case, though, and there is a shortfall or he can’t re-rent the space you had, you may have to go to court.

If you are in a strip mall and the landlord has other tenants, Sarasek suggests talking to them as well, since they may be looking for more or different space.

You can fight back, too. If the landlord isn’t maintaining the center – say huge potholes, missing lights – then you may actually have a justifiable cause for not paying rent. It’s called "untenantability," Sarasek says, meaning you can’t use the space as it was intended.

What about going bankrupt?

The last way out is to file for bankruptcy. "I'm not encouraging it," Sarasek says, “but sometimes it's the final thing to do." Filing bankruptcy will essentially terminate your lease, and the landlord will have to get in line with all your other creditors.

Get a lawyer to help you out. A local sole proprietor will be your most affordable bet, says Tom Sestanovich, a commercial real estate expert and partner at Moldo Davidson Fraioli Seror & Sestanovich in Los Angeles.

Whatever you decide to do, make absolutely sure your next commercial lease, if there is one, provides for the possibility things may go south.

Sestanovich  recommends considering these questions before you sign: What is your exposure if things go wrong? What surrender provisions can be worked out? Can you get broad sublet and assignment rights? "It all starts before the lease is signed," he says.

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To rent out empty rooms, turn to local media and Craigslist.

Sherri Birdsall, Gensis Medical Education Consultants, Orange, Calif.
I work for a business that teaches continuing-education courses for nurses in Orange, Calif. Most of our classes are conducted on weekends, which means two beautiful classrooms sit completely unused most of the week. I’d like to rent them out to bring in extra money. Any suggestions on where to start?

By Kathleen Ryan O’Connor, Fortune Small Business contributor
Dear Sherri: If you’re planning on playing the role of part-time landlord, you might be tempted to contact a professional for help. But Adam Brett, a realtor with RE/MAX NOC in Fullerton, Calif., says that if the space you’re renting is small, you’re best off doing it on your own.

Instead of trying to discern who might need an empty classroom during the week, put the word out and let renters find you. Posting the opportunity in local media outlets and community forums will help you cast a wide net for tenants. You should also consider putting up fliers at gathering places such as the public library.

If you decide to go the newspaper route, contact the Foothills Sentry, a biweekly newspaper that publishes exclusively in your area and sells space for advertisements. A good-sized display ad costs just $17, while a straight classified posting costs $5 per line. The publication goes out to about 45,000 single-family homes.

Another option is the Orange County Register, a large daily newspaper. The Register has a much greater reach than the Foothills Sentry – the average weekday circulation is about 250,000 copies – but all those extra eyeballs will cost you. A five-line classified ad that runs once on Sunday and online all week goes for $119, or $160 for two days.

Newspapers and libraries are good forums for advertising rental space, but your best option, says Brett, could be Craigslist. Posting an ad in the “office/commercial” section of the site, which is listed under “housing,” is completely free. Brett also advises you to look for other posters on the site who are trying to rent similar properties (you can enter terms such as “classroom” in the search space to find these ads). E-mail them to see if they’ve had to turn away any interested parties, and ask them to pass along your contact information. Many Craigslisters would be happy to help.

While California real estate is still taking a hit, “the lease market remains very strong,” says Brett. With a small amount of effort, you stand a good chance of finding a tenant who’s looking for a classroom of his or her own.

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Troy L. Whitaker, Los Angeles
I earn over $100,000 a year. Does that mean I can’t deduct my rental properties’ mortgage interest? As I understand it, I can only deduct it from the income I make off my renter. Is that correct?

By Shara Rutberg, Fortune Small Business contributor
Dear Troy: We’d need more information about your specific situation to provide a definitive answer; however, here are a few general points to consider.

The rental income from your properties is considered a “passive” activity.

“You can only take deductions related to a passive activity to the extent of income from that activity, but there are a couple of exceptions,” says Tom Ochsenschlager, vice president, taxation of the American Institute of Certified Public Accountants.

One exception comes in when you “actively participate” in the rental activity. If you do, you can take a deduction of as much as $25,000 in excess of the rental income, explains Ochsenschlager.

However: "The $25,000 is phased out by 50 cents for every dollar your adjusted gross income exceeds $100,000," he says. "So, it’s completely phased out when your adjusted gross income exceeds $150,000. Therefore, depending on you income, you may get some benefit.”

What does “actively participate” mean?

“It’s rather vague,” says Ochsenschlager. “You don’t have to snake out drains, but you should do such things as approve tenants, rental terms, repairs, etc. ‘Active management’ might be a better phrase.”

Assuming you are renting to make a profit and not living in any of these properties, your deductible rental expenses can be more than your gross rental income, says Vicki H. Meyer, counsel to Thomas Howell Ferguson PA in Tallahassee. Your rental losses, however, may be limited by the "at-risk" rules in addition to the passive-activity loss rules. The at-risk rules limit your losses from most activities to your amount at risk in the activity.

“You carry any excess loss forward to the following year or years until used, or the losses may be fully deducted in the year you dispose of your entire interest in the activity in a fully taxable transaction. Therefore, losses limited by the passive loss rules are delayed, not denied,” Meyer says. Getting your deduction many years later, when you dispose of the property, may lessen the value of the deduction, she adds.

Disclaimer: This column provides general information only and is not intended to replace the services or legal advice of an attorney or CPA. Always consult a lawyer or accountant regarding specific legal or financial issues.

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Angela J. Thomas, ATM Investments, Baton Rouge, Louisiana
I am just starting out in the investment world and am still a bit green in understanding certain things. I purchased two investment properties in 2004 and am renting them out. This year, I created an investment LLC for them. My questions is, although I have the LLC with its “limited liability,” do I still have to put insurance on the company?

By Shara Rutberg, Fortune Small Business contributor
Dear Angela: You don’t have to, but it would definitely be wise.

Forming an LLC shields the owners, called “members,” from liability, but the firm itself is still liable, explains David Sokolow a senior lecturer at the University of Texas at Austin School of Law whose areas of expertise include corporations. In this respect, an LLC is similar to a corporation, in that shareholders aren’t liable but the firm itself is.

“You should purchase the same kind and amount of insurance you would if you were operating the business as a corporation. Although you may not be personally liable, third parties may not want to deal with your LLC if it doesn’t have insurance,” he says.

Peter Bennett, chairman of the American Bar Association section of tort trial and insurance practice, agrees.

“The selection of a form of a business is not a replacement for insurance,” says Bennett, who is also president of The Bennett Law Firm, PA in Portland, Maine. “You need coverage to protect against liability.”

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Vikas Sawant, Highland Park, N.J.
How should a seasonal business rent retail space for only a few months?

What do you recommend? Leave a comment below with your answer.

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Martin Woomer, Silverdale, Wash.
I am thinking of buying a rental property that I may live in for a while. How do I transfer the title from my person to my business (I'm a sole proprietor)? Or is it better for my business to buy it, then have me rent it? Any suggestions? Thanks.

By Shara Rutberg, Fortune Small Business Contributor
Dear Martin: Regardless of whether your business is a sole proprietorship or an incorporated business, the process of having the business buy real estate for rental and then renting it to the owner is not a simple one, according to financial strategist Sean Monohan of Certified Financial Strategies in Dallas.

How you buy depends on a variety of issues, including: What type of property is being purchased? Will the property produce taxable income or tax losses? How long will the property be owned? What is the expected appreciation value? What type of business does the owner have, and how profitable is it?

There are also tax considerations, adds Scott B. Osborne, an attorney with Kirkpatrick & Lockhart Preston Gates Ellis LLP in Seattle. In particular, the capital-gain tax exclusion for personal residences could make individual ownership of the home more advisable.

Owner-occupants benefit from other advantages. As an owner-occupant, you’re more likely to qualify for the lowest mortgage rate available, according to financial advisor Terry J. Siman, president of Vantage Pont Advisors Inc. in Blue Bell, Penn.

“If you begin by considering it an investment property and don’t use it as a residence, the rates to borrow, for commercial purposes, are likely to be higher,” he says. As an owner-occupant your bank costs will be lower – not only your mortgage rates, but also your insurance costs. "Insurance companies assume an occupant who is the owner will take better care of the place," Siman says.

While deciding how to make your acquisition may be complex, “actually transferring the title to another legal entity is not really an issue,” says Monohan. “It generally requires paperwork at the local county clerk’s office, and the receiving corporation makes the appropriate changes in the company records related to capital contributions and percentage of ownership for impacted shareholders of the corporation.”

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Should a buyer pay more for a building if selling it would mark the end of the owner's business?

Michael, Salem, Ore.
Dear FSB: My parents have a small business and own the building in which it operates. The person next door would like to expand by buying my parents' building, and keeps asking them for a price at which they would sell. My Dad would like to retire if they sold it, and would lose the income from the business. Two questions: Should the person pay a premium because he needs the building to expand? (Supply and demand, right?) And second, should the value of the business itself be added to the asking price, since he would be putting my Dad out of business?
By Katie Ryan O'Connor, Fortune Small Business contributor
Dear Michael: You are right in assuming supply and demand are at work here, but perhaps not exactly in the way you think.

“Of course, you can set the market value of the property at any price you want, for any reason you want,” says Brad Meyer, president and CEO of Dallas-based Trinity Real Estate Solutions, a nationwide real-estate inspection firm. “But prospective buyers will be evaluating it from various perspectives too: location, ease of access, expansion room, signage exposure, age, maintenance, income potential, area property sales, size of lot, potential hazards (flood, fire, etc.), to name a few.”

The factors that might mean a lot to you – such as making sure your Dad has a well-funded retirement – aren't going to hold a lot of sway with buyers. So be sure to separate your emotions from the market.

“Many sellers have a strong emotional attachment to their property. They believe it is worth more than market value,” Meyer says.

That point is echoed by Gary Grudnitski, a professor of accountancy at San Diego State University with real-estate valuation experience.

A potential buyer isn't going to respond to the fact Dad is retiring in the same way you would, for obvious reasons. “After all,” Grudnitski says, “[Dad] is not precluded from working elsewhere” just because he sells the business.

Your best bargaining chip seems to be with the expansion possibilities the property offers the buyer next door.

“Typically when you are talking about a commercial property, you are talking about what that property will return based on its usage,” says Grudnitski. “If it means they will just have to knock down walls rather than move their whole business premises, I would bargain hard for that. From the buyer's standpoint, this is much different from moving somewhere brand new.”

Meyer recommends you seek a qualified property appraiser or commercial broker. They can conduct a "broker opinion of value" (a detailed assessment of a property's market value, given the economic characteristics of the property and the prevailing trends in the marketplace) and provide an objective opinion on the property.

The Appraisal Institute offers links to expert local appraisers on its website, says Leslie Sellers, vice president of the Chicago-based organization, who recommends you also seek an “investment value” analysis of the property which, more than market value, will take into account some of the relevant intangibles, such as the benefits to the adjoining owner.

Give us your advice: Check out recent “Ask & Answer” questions.

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