Learn to Protect Your Assets

 

Protect Your Assets:  Create An LLC

 LLC’s have several unique features that you should be aware of:

The next tool that we use to protect investment real estate is the Limited Liability Company or LLC. LLC’s are the new kid on the block, having been created about 25 years ago.  Slowly, each state adopted its own version of the Limited Liability Act and now all states have given them their blessing.

1. The participants in an LLC are called members, not partners. They are broken down into two types – regular members and managers. For small, closely held LLC’s the member(s) is the manager. For larger entities, a separate, third party manager may be brought in.
2. Unlike the limited partnership that requires two entities for complete protection (i.e. the limited partnership itself plus a corporation to protect the general partner), the LLC requires only one entity. That usually makes it simpler and less costly to set up and operate.
3. While LLC’s default to being treated as partnerships for tax purposes, they have the flexibility of being taxed either as “S” corporations or “C” corporations as well.
4. Just like the Limited partnership, LLC’s are protected by the charging order.

Because of the last three features, LLC’s are being used more and more for retail and service businesses, in addition to real estate.  So, are Limited Partnerships a thing of the past?  No, not really.  They still have their place.  One situation is when you want control centralized in one person (or entity).  Also, some states have an additional tax that they impose on LLC’s.  So, it’s important to understand your particular needs prior to setting up your next entity.

What is the best entity for me?

There is no easy answer to that question, it really depends on the type of business, where it is, the number of “partners” or shareholders and what other entities you may already have.  But, here are some guidelines:

Non Real Estate

If and if this is your first business, you probably want a flow through entity. That way, if your business loses money during the start up phase (as so many businesses do), you can offset other earned income by the amount your business actually lost.  Sole proprietorships and general partnerships are out, because of the horrible liability they expose you to. 

That leaves us with “S” corporations and LLC’s that have taken the “S” election for tax purposes.  Some, but not all states treat LLC’s less favorably, so that will affect the ultimate entity choice.  I lean towards LLC’s because of the added asset protection resulting from the charging order.  They also have relaxed rules concerning the keeping corporate minutes and resolutions and other corporate formalities.

Real Estate

Historically, we place real estate into a limited partnership; especially for projects where there are passive investors.  Limited partnerships provide a clear demarcation of management and ownership, and carry the added benefit of the charging order.

Yet, LLC’s also work well with real estate, especially for individuals who are investing by themselves.  They provide the asset protection of a separate entity; the added protection and deterrent affect of the charging order and give you flexibility as to the tax effects. 

The ultimate question is which entity(s) will best serve you now for your current business purpose. Often, the answer is, in apart, a matter of timing.

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