LLC's

What is an LLC?

LLCs, otherwise known as limited liability companies, are types of business entities. LLCs were created as a hybrid of corporations and partnerships to offer the flexibility of a partnership, with the liability protection of a corporation. LLCs are formed at the state level. Each state has its own LLC formation requirements.

Why should my investment property be titled in an LLC?

An LLC can offer two main benefits (although there are many others) – asset protection, and potential tax benefits. The main purpose LLCs are formed is to protect the owner’s assets from any potential lawsuit or other liability involving the LLC. If the LLC corporate formalities are adhered to, the owner’s assets are insulated from LLC debts and other liabilities.

For example, if there is a slip and fall on your investment property and the property is titled in your individual name, the plaintiff would have the potential to get a judgment against you personally, and all of your personal assets would be subject to that lawsuit judgment. However, if your investment property is titled in an LLC, only the assets of the LLC are at risk, while your personal assets are protected.

What state should I form my LLC in?

Your LLC should be formed in the state in which your investment property is located. If you have multiple investment properties in multiple states, I often recommend that you establish a holding company in a favorable jurisdiction that would then hold your interests in each of your investment property LLCs in each state. I have experience forming LLCs in all 50 states.

Should every property be in a separate LLC?

There are different schools of thought on this issue. It is generally my opinion that you should have every investment property titled in a separate LLC. That way, if one property is involved in a lawsuit, only the assets of that particular LLC that holds title to that investment property involved in the lawsuit are at risk, while all others are protected. If all of your investment properties are titled in one LLC, all of your properties are at risk if one property becomes involved in a lawsuit.

I am adamantly against the formation of Series LLCs. I would be happy to discuss my many reasons why.

What documents are required to form an LLC?

Articles/Certificate of Organization – this is the document filed with the state to organize the LLC. While not overly complicated, several important legal decisions need to be made in the formation process including whether the LLC will be manager-managed or member-managed, who those managers or members (owners) will be, who the registered agent will be, etc.

EIN – Your LLC will need its own federal tax ID number used to open a bank account for the LLC, and to file tax returns.

Operating Agreement – This is perhaps the most important document of the LLC. A well drafted operating agreement will cover numerous important topics such as LLC managers, LLC members, capital accounts, capital contributions, distributions of profits and losses, transferability of interest, and more. It is imperative that the LLC operating agreement be drafted in a way that is most advantageous to you and other investors. Operating agreements are particularly important where there is more than one member or manager.