Written Contribution by Ryan Blaney
From our last article you might remember the mighty LLC. The LLC is a legal business entity whose members cannot be held personally liable for the company’s debts or liabilities. Limited Liability Companies are considered “hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship.” LLCs have in fact their own bank account, tax ID number and assets, conducting real estate investment and transactions under their own name, and transforming the way buyers purchase and own a second home.
Funding an LLC property ownership is simple. The LLC pays for real estate purchases using its own funds, independently of how many members are part of it, making it crystal clear where the ownership lies.
The most distinct and appreciated advantage LLCs hold over traditional partnerships is the liability. Each member of an LLC is limited to that individual’s financial investment. Accidents can happen, and in the worst case scenario (differently from other forms of co-ownerships) the owner can’t lose more than the assets held by the LLC. In this manner, external assets cannot be accessed stemming from a lawsuit, bankruptcy, or foreclosure.
For Commercial Real Estate (CRE) investors, LLCs provide an opportunity to safely diversify. For example, a property owner can use one LLC for a unit they own in Los Angeles and use another LLC for a commercial property in San Diego. If anything happens at the Los Angeles property, a lawsuit would not impact the owner’s San Diego assets. While it is important to have liability insurance, that might not always protect you in a lawsuit. (For example, intentional torts are not covered by insurance.)
LLC property ownership is one of the easiest ways to gain privacy: when a home is purchased, the LLC name is recorded on the deed and available to the public, as opposed to the owner’s name being in the public records.
Another one to add to the pro list of LLC property ownership comes at tax time. Properties aren’t taxed directly — owners report their share of the income or losses on their individual tax returns. This could mean thousands of dollars’ worth of annual tax savings.
To balance it out, we can observe some of the cons of an LLC in this setting. Most likely you’ll need a lawyer to research regulations, to outline complex operating agreements and getting it right is critical — your rights, responsibilities, and profits depend on it.
Costs: There are costs associated with forming an LLC and for keeping it in good legal standing. Insurance premiums for the property held by the LLC will likely be higher than insurance for the property if it is held in the owner’s personal name. The costs and ease of obtaining a mortgage for the property will increase if it is held by an LLC.
Schedule a consultation with us to discuss setting up an LLC for your properties to protect you from liability. Contact Kendall Law today or call (310) 619-4941.