LLCs for Real Estate Investors

This article is for informational purposes only. Nothing in this article should be understood as legal advice, and no attorney-client relationship is created by it or the information it contains. Consult with a licensed attorney if you require assistance in a legal matter.

Whether starting a new business or reorganizing an existing business, one of the most important decisions an entrepreneur will make regards the form the business will take. Given the wide variety of business forms, such as corporations and sole proprietorships, it can be difficult to choose between them. The limited liability company, commonly known as an LLC, has become a popular option.

Advantages
One of the first and most important advantages of the LLC form is the limited liability it provides to members. Members subject to a lawsuit may have their interest in the LLC attached, but the assets of the LLC will generally remain outside a creditor’s reach. And if the LLC is the defendant in a suit, barring special circumstances, the members are not personally liable for the LLC debts. Second, LLC operating agreements often contain limitations on transferring member interests. These usually cause member interests to be less valuable to a creditor, thus making the LLC useful as an asset management technique. Third, the LLC works well as a real property management tool because it allows for continuity in property ownership and can limit liability of members as discussed above. Because the LLC owns the real property and is the landlord in any lease agreement, long-term leases can continue uninterrupted even if the LLC membership changes. Finally, an LLC can play a role in a comprehensive estate plan. Often, a member has substantial property but does not wish the property to be broken up at the member’s death. The member may transfer the property to the LLC and then gift fractionalized shares of his or her membership interest to relatives. The property remains intact, while the benefit of the property has been passed on to the next generation. This technique commonly affords estate and gift tax benefits as well.

Disadvantages
As with any business form, there are disadvantages to the LLC. First, an LLC generally requires more effort and expense to create than a sole proprietorship or partnership. The LLC must be specifically created as an LLC and annual fees are required by California. Second, while not as rigid as a corporation, the recordkeeping requirements of an LLC are still substantial. Similar to a corporate charter, the LLC operating agreement should be written out and strictly followed; business records and minutes of meetings should be kept in accordance with the operating agreement. The tracking of “Capital/Member Accounts” can prove difficult, as these accounts reflect the value of the each member’s ownership interest and include the liabilities of the LLC, capital contributions of members, and income distributions by the LLC. Third, while holding property in an LLC might limit its value to creditors, it might also limit the ability of a member to readily sell his or her interest to a willing buyer. Finally, LLCs carry with them a number of inherent tax consequences which might limit their desirability to investors, especially those depreciating assets against other income.

Conclusion
Using an LLC may help a business and its owners protect themselves from liability and improve the stability of the company. But the LLC has its drawbacks, as well. You should consult with a qualified attorney to help determine if the LLC is the right answer for your business interests.

By The Burton Law Firm

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