What Is A Limited Liability Company Or LLC?

You may have heard about Limited Liability Companies (often known by the initials “LLC”).  An LLC has the same tax advantages of a partnership but at the same time it has limited liability, like a corporation.   As LLCs become more popular and well known, you will see more of them.

A LLC has the same power to contract, buy, sell, and own property that an individual has.  The liability for the debts of an LLC are the obligations of the LLC, without further agreement, no LLC member or manager is personally obligated for the company’s debts.  Creditors will look to the assets of the LLC to satisfy any debts or obligations of the LLC.  The LLC limitation on liability does not cover certain bad acts or “torts.”  The members are personally liable to third parties for his or her own negligence, gross negligence, intentional acts, and professional malpractice.  Certain professions (accountants, lawyers, etc.) should use a different type of LLC, known as a Professional LLC or PLLC.

To form an LLC, a Certificate of Formation is filed with the Secretary of State.  The Certificate of Formation must include the following: (a) the name of the LLC; (b) the address of the registered office and name and address of the registered agent for service of process; (c) the address of the principal place of business of the LLC; (d) the date on which the LLC will dissolve if any; (e) if the LLC is managed by one or more managers, a statement to that effect must be included in the Certificate of Formation; and (f) the name and address of the person signing the Certificate.  The filing fee for the Certificate of Formation is $175.00, payable to the Secretary of State.  A signed consent of the registered agent must be submitted with the Certificate of Formation.  Once the LLC is formed, it must file an initial report, and an annual report every year.  If this form is not filed with the Secretary of State, then the LLC will be administratively dissolved.  The initial report is due 120 days after the filing of the Certificate of Formation.

Once the LLC is formed, the shareholders of the LLC, known as “members” will often enter in an Operating Agreement that explains the details of the operation of the LLC.  The Operating Agreement functions much like the Articles of Incorporation and Bylaws do for a Corporation.  The Operating Agreement must be in writing.  It is not filed for public record, but instead stays private.  The Operating Agreement governs the company’s operations, and describes the relationship between the owners of the company.

LLCs are becoming increasingly popular as an entity for owning real estate.  As you know, real estate investments are risky.  There are many potential liabilities.  For example, owners are liable for mortgage and lease payments, environmental clean ups, contract breaches, negligent acts, and other items.  A member of an LLC is only at risk to the extent of the value of goods, services, or cash they have contributed to the LLC.  An LLC allows all of the members to have limited liability protection, even if they are involved in the management of the business.  In addition, there are some tax advantages to being an LLC to own real estate.  For example, real estate developers may deduct start-up losses which otherwise could be subject to passive loss rules.  Also, an LLC itself is not subject to income tax.  The LLC’s income, gain, loss, deductions, and credits flow through and pass on to the individual members.  The LLC losses can be used by the individual members to offset their income from other sources.  Finally, assets such as real estate owned by an LLC are not subject to probate; only the deceased person’s interest in the LLC is.  This can provide an LLC member some estate planning advantages as well.

Consequently, if you are consistently investing in real estate, it may be a good idea to look into forming an LLC.  You will be only taxed once on the income the LLC earns, and your potential liability to others will be greatly reduced.  The paperwork requirements are minimal, and the state’s bureaucratic requirements are reasonable.  All in all, the LLC is a very useful entity for many business purposes, including the ownership of real property.

This article contains information of general interest, and is not intended to be, nor should it be relied upon as a substitute for specific legal advice.