Protecting Real Estate Using the Limited Liability Company

Asset protection is a hot topic for most commercial real estate investors. Asset Protection should be approached differently for each different type of asset. As for commercial real property, asset protection can be achieved by properly titling newly purchased commercial real estate property. Tiling options may include: holding the real property in the investor’s personal name, jointly with one or more individuals or partners, as husband and wife (tenants by entirety) or in a corporate entity. Depending on the particular circumstance, the best and most protective options for titling is either jointly, tenants by entirety or in a corporate entity.

There are several options when it comes to using corporate entities to hold commercial real estate property. The most popular business entity is the limited liability company (“LLC”). One major advantage of the limited liability company is the limitation of liability to the investor’s investment. In other words, creditors can’t pursue a person’s personal and/or other business assets to satisfy claims against the LLC. Another major advantage to the limited liability company is the entity’s taxation flexibility. The LLC can be taxed as a partnership, S corporation or even a disregarded entity.

Simply forming the LLC, however, is not enough. The limited liability company must have a protective operating agreement, membership certificates and other agreements in place along with the articles of incorporation. These documents govern how the LLC operates and details transfer restrictions, which can only be varied from state law by agreement. Without an operating agreement, the limited liability company will be subject to the purview of state law, which may not be as favorable as the pre-negotiated terms of an operating agreement. The operating agreement can also offer guidance as to what happens to the company and/or membership interests in the event of a proposed sale, exchange and/or death of a member.

Further, if you have multiple properties then you should consider spreading your “eggs” across multiple baskets. This can be achieved by incorporating separate business entities to hold each respective commercial real estate property. Each business entity should have its own operating agreement, membership certificates and other protective agreements in place, as necessary.

Contact Capital Planning Law, PLLC for your complimentary consultation to discuss your estate planning, business law, probate, guardianship and/or real estate needs.