REDUCE FINANCIAL RISKS BY FORMING AN LLC
Acquiring and maintaining real estate can be an expensive and risky venture. Searching to find just the right investment property—whether it be residential or commercial—can make for a stressful process, particularly in the current market. After acquiring the property, there are operating maintenance costs and capital expenses (e.g., upgrades and/or repairs). You will put a lot of time and energy into it and probably consider it a precious asset.
You may not be the only one to see the value in your property. In the world today, lawsuits abound. Car accidents happen. Business deals go wrong, estate plans go awry, and people get injured on your property.
If property is held in your name, it is vulnerable to attack by litigants or creditors. While insurance can ease the burden (and is an important weapon in your liability protection arsenal), it has limits and might not provide adequate protection to your real estate, especially if any negligent acts by you or your agents result in serious injuries to others. If you’re not careful, you can lose the property that you worked so hard to own and maintain. You might jeopardize other personal assets, including your home, bank accounts or other properties without even knowing it. In these and many other instances, placing your property in an LLC can help protect your real estate.
WHAT IS AN LLC?
LLC stands for Limited Liability Company. It is a business entity that differs from a corporation in both its federal tax treatment and the legal flexibility that it provides. An LLC includes some of the best features of a partnership, sole proprietorship and corporation rolled into one. An LLC can protect company owners (or “members”) from being held personally liable for the debts and liabilities of the entity.
In Rhode Island, an LLC may be set up to engage in most any lawful business activity.*
HOW DO YOU START AN LLC?
An LLC is fairly easy to start. It can typically be done online or by mail, by filing with the Department of State along with a filing fee.
Next, you may wish to have an operating agreement. The operating agreement is a legal document detailing ownership rights and responsibilities, and the operating procedures of the LLC. To learn more about these important agreements, check out this article.
HOW DOES AN LLC PROTECT ASSETS?
As the name suggests, Limited Liability Companies are similar to corporations in that they can provide limited liability protection for members. Any judgments issued against the LLC may result in seizing its assets, if any, while leaving the personal assets of the individual members protected.
Additionally, a personal creditor of an individual member of the LLC may be precluded from seizing the assets owned by the LLC if the operating agreement is properly drafted.
WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF AN LLC?
First, setting up an LLC is fairly easy and the set-up costs are tax-deductible. The “pass-through” tax treatment of LLCs (whether as partnerships or single-member companies) allow members to avoid the “double taxation” that corporate stockholders face—being personally taxed and having your entity taxed as well. Unlike a corporation, an LLC is not required to hold annual owners meetings or memorialize minutes from such meetings. LLCs offer significant flexibility in the rights, responsibilities, and restrictions that managers and members agree to.
Protecting your real estate requires transferring the property into the ownership of an LLC. However, keep in mind that if a property is being financed, some mortgage lenders are hesitant to lend to LLCs. Likewise, there are some mortgages that include a “due on sale” clause requiring the complete payment of the balance owed on your mortgage upon the transfer to another entity. Therefore, prior to transferring any properties to an LLC, the matter should be discussed with your lender in consultation with your business attorney.
Next, if an LLC files for bankruptcy, the members do not have to use personal money to pay for any debts owed by the company. If you own several different properties, each one can be placed in a separate LLC, thereby protecting them from potential lawsuits arising from your ownership of other properties. If each property is placed in a separate LLC as a separate business, each particular property will be insulated from any liability arising from one of the other properties. In addition, any other personal assets will be protected.
Finally, an LLC may be helpful for passing on appreciation to a family member or spouse without incurring any additional capital gain liability. To learn more about this, consult with your succession planning team at Whelan Corrente.
FINAL THOUGHTS
An LLC is fairly easy and inexpensive to start and offers many benefits to owners of real estate, including the protection of personal assets from lawsuits and other creditors as well as offering an avenue to transfer property, profits and interests to family members while avoiding huge tax penalties.
For more information about starting an LLC, using it as a tool to protect your real estate investments, or to talk through a related topic with us, you can reach Owen Lynch directly at olynch@whelancorrente.com or 401-270-1047.
* This general statement is not intended to address all business activities or entity types allowed or required under Rhode Island law. For specific advice, please consult an attorney.
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Disclaimer: The information above was prepared for general informational purposes only and does not constitute legal advice. It should not be relied upon or used as a substitute for seeking professional legal advice from an attorney. Readers should contact an attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of any information in this article without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein-and your interpretation of it-is applicable or appropriate to your particular situation. Use of and access to this information does not create an attorney-client relationship.