Investing in real estate and maintaining rental properties is a lucrative endeavor that many individuals use to produce income, tax advantages, or recreational retreats. Holding property as an individual, while often times simpler, creates certain problems and liabilities to your personal (or marital) assets. However, holding real estate investments in a special LLC allows more flexibility and protection for your investment.
Is an LLC the correct entity choice?
Often times, individuals or groups looking to purchase property jump straight to an LLC structure. While an LLC is a popular choice and often the right one, you should familiarize yourself with different corporate structures and whether a partnership or corporation may fit more with the goals you have for your portfolio or the business conducted by the organization.
Common Mistakes When Using An LLC
Forming an LLC to avoid liability only works when you are committed to actually using the LLC and observe the corporate formalities required when doing so. Forming the LLC does not simply absolve the members or managers of all liability just because the entity exists. All members or managers conducting business with or for the entity absolutely must observe the corporate formalities such as: using specific LLC checks and banking information when making purchases, signing documents and contracts as the LLC or their roles as directors of the LLC, strict financial procedures that avoid the comingling of personal and business assets and funds, and ensuring corporate structures and guidelines in the Articles of Organization and Bylaws are followed to the letter for procedures undertaken by the entity. Failing to observe corporate formalities results in personal liability for individuals within the LLC.
Purchasing Real Estate With the LLC
An LLC can absolutely purchase and hold real estate such as investment or rental properties. Purchasing and holding property in an LLC affords individuals significant tax benefits as a “shelter” and helping defray penalties. In fact, setting up individual LLC’s or “subsidiaries” for each additional property may help to provide additional layers of protection and further insulate each individual property from the next. For example, a cattle ranching operation in Kansas can be held in an entirely distinct LLC filed and incorporated in Kansas while a condominium in Denver can be held by an LLC incorporated in Colorado with both entities being owned by the same individual or group of investors.
Real Estate LLC’s for Hunting Clubs
Hunting buddies often dream of one day owning a piece of ground to call their own. Whether after ducks or bucks, a small property owned by a group of hunting friends can be a rewarding endeavor as long as certain protocols and eventualities are planned for. What happens if a member wants to leave the LLC after years of improvements and increases in land value? How will the crop or grass rentals be handled and the profits be distributed? What policies will exist as far as guest or family allowances?
If you are thinking of purchasing investment or recreational property, careful consideration should be paid to understanding corporate structures as well as the benefits to each and how they play into your individual (or group’s) situation. The Law Office of Nathaniel Gilbert, LLC provides guidance in many forms for formation and maintenance of Real Estate LLC’s from flat fee organization and startup, to full service maintenance and representation for entities, members, and managers.