Limited Liability Company Formation
Business Entity Formation
Holding property or other business assets in the form of a Limited Liability Company offers significant advantages, primarily by providing the owner with a “veil” of limited liability, while offering “pass-through” taxation not available to regular corporations.
Limiting liability is important for all business owners, and particularly for real estate developers. A developer or business owner who does not hold their business assets in an entity such as an LLC risks having a business liability attach to personal assets, and personal liabilities attach to business assets. For example, without the protection of an entity, a lawsuit brought against a development, if won by the plaintiff, allows the plaintiff to recover damages from the developer’s personal bank accounts and properties.
LLCs allow business to be conducted through an entity considered legally to be separate from the individuals or partners running the business. This distinction greatly reduces the risk that a business owner’s personal assets will be jeopardized for actions of the business.
The advantages of using an LLC to hold and develop property include:
- No management restrictions as in a limited partnership
- Partnership "pass-through" business tax treatment (no double tax)
- Limited liability
- The ability of investors to participate in management without losing their liability protection as in a
Most real estate developers choose to use LLCs to hold real property in development projects. An LLC has the advantage of having substantially similar liability protection features of a corporation whereby a lawsuit brought against an LLC cannot easily reach the personal assets of the owners of that LLC. The LLC is also treated more favorably than corporations for tax purposes. A corporation is taxed on all income it receives, and the shareholder of a corporation is also taxed again on the dividends he or she withdraws from the corporation. In contrast, LLCs are what is commonly referred to as "pass-through" taxation entities. The income received by an LLC are not subject to the corporation "double tax" and are instead taxed once as income to the individual owners.
Summary of Benefits:
- LLC members may divide income and tax liability among themselves in any manner they choose.
- Avoid corporate-level income tax gain when appreciated property is sold.
- Flexibility of structure, low costs and relative ease of formation.
- LLCs may be owned by other LLCs, corporations or companies.
- No restrictions on shareholders.