Is the choice of a limited liability company in which to vest real estate a good idea?
When it comes to choosing the form of company to hold a portfolio of real estate investments there are a number of choices, and they may be confusing without asking a knowledgeable attorney. Generally speaking, a good choice for a company intending on vesting real estate holdings is the limited liability company (LLC).
The major reasons someone might wish to choose a LLC are because it tends to limit personal liability but maximize asset protection, which is always a good thing. LLCs are a good choice to confidently organize an investment business and there may be some nice tax benefits, one of which is a one-time tax on member’s profits.
A business entity such as a limited liability company is considered to be a separate legal entity that has a life of its own. It has certain rights and duties it needs to carry out. It is responsible for filing a tax return on its own. In other words the limited liability company is independent, and because it is viewed that way, it needs to be at arm’s length in terms of being properly “legal.”
In other words, the company “must” have and keep a separate character because if it does not, the owner of the business runs the risk of being personally liable for actions taken by the company or its agents and workers. This is known as the legal doctrine of piercing the corporate veil.
If the company doesn’t follow these “corporate formalities” such as maintain all required records, pay taxes, hold meetings and have a bank account it uses regularly, then the owners may lose the benefits and protections the company was designed to create. In an instance such as that, the courts could allow a creditor to go after the owners personally and disregard the company, as it would be considered to be a personal “alter ego” of the owners.
This is the one area where most investors go wrong when they set up their companies. They go through the motions, but don’t really do much else to make the company a “real” company, thus leaving the door open for personal liability.
If a client wants to start a business in Texas, we often recommend that they form a exas LLC because of the legal protections and benefits it provides. However, the specific circumstances and needs of each client are different and this is a decision that is best made in consultation with a business attorney.
The attorney will cover other requirements that may need to be dealt with such as filing a DBA certificate, choosing the right company name, separating the company assets from personal assets and other issues that may arise under the circumstances presented. Clients should also consult with their CPA or tax attorney about the tax issues related to the business entity they choose.