Why Form an LLC? To Protect Your Assets!
In reality, there is no 100% guaranteed way to protect your assets, but a Limited Liability Corporation (LLC) for your real estate business is essential to mitigate risk and separate business from personal assets. The LLC offers benefits of a corporate entity, but with the flexibility of a partnership, providing a barrier between the business assets and your personal property so that only the assets owned in the name of the LLC are subject to claims against the business (including lawsuits and creditors).
Real estate owners with multiple properties can consider a Series LLC which provides for compartmentalization of assets into sub-companies. Under this structure, the parent-LLC is like an umbrella organization over multiple real estate LLCs to operate different businesses.
Key benefits of the LLC include:
- Separation of Business from Personal Affairs. Establishing a bank account in the name of the LLC and using the account for all business issues of the LLC prevents commingling of funds and maintains separation between your personal assets and your business assets.
- Separation of Affairs between Different Businesses. By not commingling assets between your businesses further protects you and the business.
- Anonymity. An LLC provides anonymity between your personal and business assets. Deeds should be taken in the name of the LLC, and your customers and tenants should write checks to the LLC, not to you personally.
There are several key steps to establish an LLC:
- Select a company name. You can select a generic name and then file a DBA with a more creative name, if desired. Avoid using your personal name if you want anonymity.
- Give your attorney a list of members and their ownership interest. You will need to determine a registered agent with a physical street address. Registered agents receive and forward mail and are the first to receive the initial notice about a lawsuit. Your business must have an address or a post office box, but do not use your home address.
- Member-Managed vs. Manager-Managed. Determine if your LLC will be member-managed or manager-managed, keeping in mind that manager-managed provides the following benefits:
- Nominal members do not have the power to bind the LLC without the approval of other members.
- The Secretary of State requires all members to be listed for member-managed, but provides anonymity for manager- managed LLCs.
- Execution of contracts is smoother because a manager- managed LLC has the authority to enter into transactions, which are accepted by title companies and other businesses
LLC Challenges and Responsibilities
There are some expectations of an LLC owner as well as some inherent problems each should be aware of including obtaining an EIN number and creating separate bank accounts to allow the LLC to be managed as an entity distinctly separate from the individual’s personal affairs. Additionally, you may need to work with a commercial lender to obtain a loan and most likely will be required to sign a personal guarantee.
While there are internet companies that form LLCs, it is advisable to engage an attorney to form the LLC for guidance, instruction, and clarification about how the entity functions. Not using an attorney to set up an LLC is like buying medication to cure a disease without confirming that you need the particular medication, that you have the right dosage, or have proper instructions on how to take the medication.
Internet companies forming LLCs do not:
- Give advice on overall asset protection plans.
- Serve as organizer, initial member, and/or registered agent.
- Provide advice on moving property to the LLC after formation. • Detail how to inject capital into the LLC or to structure the finances.
- Provide instructions on maintaining the liability barrier.
- Allow an opportunity to form a relationship with an attorney for follow-up questions or advice.
To ensure protection of your assets, rely on the professional experience of a skilled attorney to establish your LLC. Cassie McGarvey of McGarvey PLLC is double board certified in Commercial and Residential Real Estate law. She helps people and businesses resolve real estate and title issues. For more information on how to set up an LLC to protect your assets, contact Cassie McGarvey at firstname.lastname@example.org.
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