LLCs are widely used and appreciated by most commercial real estate investors. The main benefits of LLCs are well documented: liability and asset protection, tax benefits, management flexibility, and flexible ownership structure. However, commercial investors must recognize the critical, potential LLC-related sticking
points — and consider the value of professional guidance to avoid these — so they don’t put themselves at a disadvantage.
Understanding the Limitations of LLC Asset Protection & “The Veil”
There is a significant appeal for commercial real estate investors regarding liability and asset protection. Still, it is crucial to realize that the veil you have set up can be pierced under certain circumstances. These scenarios include commingling personal and business assets, failing to maintain corporate formalities, and using personal guarantees.
It is a misconception that your LLC automatically provides an absolute safeguard against personal liability, so correctly using your structure is crucial. With this understanding and a checklist of the appropriate measures, you won’t be undone by a false sense of security.
Tax Benefits and Liabilities: A Constantly Changing Landscape
It is crucial to consider any fallout from the transfer of tax obligations, depending on which jurisdiction you are operating in. Most commercial real estate investors know that tax liability changes can occur when property ownership changes hands — from a property sale or tenant turnover. The dreaded transfer tax can add a burden to already complex transactions. Tax transfer rates can also vary, complicating your investment decision with unexpected profit-eating costs. The antidote to all this is to research tax rates with great care, correctly structure your ownership, and get professional guidance.
Management Flexibility and Financing Challenges
The beauty of LLCs is that members can be individuals, trusts, corporations, or even other LLCs. Flexible asset management that comes with LLCs also includes the massive benefit of anonymity. Plus, it can be highly beneficial to choose to be member-managed, where all members participate in decision-making. Alternatively, the manager-managed approach, where designated members are appointed to run the company, may be advantageous.
However, it is crucial to remember that each member becomes jointly responsible for any property debt. Every member must sign each loan. This requirement can pose problems when members don’t have strong credit scores (life happens, and we all can be hit with unexpected twists and turns that can destroy a previously pristine personal financial picture).
.png?width=1680&height=945&name=Mastering%20LLCs%20for%20Commercial%20Real%20Estate_%20Avoiding%20Common%20Pitfalls%20(2).png)
More About Anonymity
If you want to create a solid asset protection structure, it starts with anonymity. Many helpful videos on my YouTube channel discuss the nuances of anonymity with limited liability companies.
Here is a practical caveat. Your information gets out there when you file an LLC on your own, and you list your information on the filing (which you must do if you file on your own in many states). If you're the member manager, your name and address will be listed.
You just lost out on the anonymity aspect of a well-structured LLC. If done right, your LLC can be set up so tenants and creditors don't know you have the asset in the first place. If you're considering setting up a limited liability company, getting solid professional guidance on the proper anonymity structure to create that LLC is crucial to protect yourself from creditors and disgruntled tenants.
Conclusion
There are better approaches than setting up LLCs for your commercial real estate assets on your own. Professional guidance is paramount to ensuring your LLC is set up correctly so you're not overpaying taxes, losing benefits, or functioning with a less-than-optimal understanding of properly using your structure.
About the Author:
Clint Coons, Esq., is a Founding Partner and Attorney at Anderson Business Advisors, a nationwide tax and asset protection firm specializing in helping real estate investors protect themselves from creditors, lawsuits, and overpaying in taxes. Set up a free strategy session with one of our senior advisors to help you go deeper and circumnavigate the challenges and legal pitfalls you face or register for Anderson’s complimentary Tax and Asset Protection Workshop.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
