Especially when my clients are acquiring investment property, I am asked what entity they should use as the Owner. Almost always, the answer is a limited liability company ("LLC"). The LLC combines the best aspects of incorporation with the tax advantages of partnership, without the red tape of either. This combination of benefits has never existed before in such a simple and effective way. Anyone acquiring investment real estate should concentrate on separating personal assets from this kind of investment. To do otherwise may subject you to risk that is not necessary. An LLC can provide personal protection in its purest form.
An LLC is a blend of some of the best characteristics of corporations, partnerships and sole proprietorships. It is a separate entity like a corporation but is entitled to be treated as a partnership for tax purposes and, therefore, carries with it the "flow through" or "cellophane" tax treatment that corporations do not have. It is flexible and simple to run and, like a sole proprietorship, there is no statutory necessity to keep minutes, hold meetings, or make resolutions; the failure to do such corporate actions have caused much pain to many corporate ventures. A meticulous LLC Manager may decide to document every business action, but it is not a requirement of the statute.
The LLC has gained popularity because it is based on the very important concept in America called freedom to contract. This means that the Members (translate owners of equity) are free to agree among themselves how the entity is to be accumulated, and split up, and that an agreement setting forth these guidelines (which takes the form of an operating agreement among all Members) will be upheld in the courts. When you combine that concept with the fact that no member is personally liable for the company debts and profits and/or losses are passed directly through to the member, you have the "ultimate pass-through entity" as the LLC is being called. The LLC is becoming more and more the entity of choice for real estate ownership in every realm and will continue to gain momentum as more and more property owners learn more about the way it operates.
The LLC also offers some unique advantages for unmarried couples who own real estate together. The operating agreement of the LLC can be used to determine an "exit strategy" should the couple break up. More importantly, the operating agreement can be fashioned in such a way as to recognize disparate contributions of equity or disparate payments on the mortgage, so there can be no problems sorting our who owns what and who is entitled to what tax deduction. In many instances, the LLC can replace the use of joint tenancy agreements and tenancy in common agreements, which are often cumbersome and difficulty to administer and enforce.
Do you need to raise money for a real estate or venture capital project? The LLC is a perfect vehicle. Admitting new members is a simple process, and there are no limits to the number and/or character of additional investors. They can include all types of individuals, corporations, trusts, pension plans, and foreign investors. This is certainly not the case with the corporate structure that most closely rivals the LLC, the subchapter S corporation.
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