It is well known in the world of investment that if you own real estate you worry about liability. This is especially true if you own several properties, particularly if they are income-producing. How can you protect yourself (and the heirs who will eventually inherit the properties) from The Big Three: taxes, creditors and lawsuits?

In a previous post I wrote about passing property on to your children using a Family Limited Partnership, which allows parents to own property in partnership with their children (lessening the amount of estate taxes that will have to be paid) but still retain control of the decision-making responsibilities during their lifetimes.  Creating such a partnership is a wonderful estate planning tool, and provides excellent liability protection for the limited partners; but in order to provide that same protection for the general partner in the FLP it is necessary to create a corporation to use as the general partner. This can be done, but not without a good amount of costly legal paperwork and ongoing administrative burden. To achieve equal liability protection for all partners, you may want to consider a Limited Liability Company (LLC).

A Limited Liability Company (LLC) is similar in many ways to a Family Limited Partnership (FLP) in that it allows you to own property jointly with your children or heirs—gifting shares over the course of time, allowing the property to transfer smoothly when you die—while still retaining control over decision-making.   Where an FLP creates a partnership, however, the LLC is a company; a standalone entity with “members” under its umbrella of protection. You can choose to create a member managed LLC, in which all the members are regular members with equal standing, or you can create a manager managed LLC, in which you have a managing member and regular members. Regardless of how the membership is set up, ALL members, whether managing or regular, have liability protection. In this way the liability protection is built in, and there is no need to set up an entirely new corporation to protect the general partner, as is necessary with the FLP.

An LLC is appealing to investors not only for its liability protections, but also because of its management flexibility.  According to this article in The Business Owner’s Toolkit, “An LLC can be structured as a “member-managed” entity, wherein all of the owners participate in management, similar to the partners in a general partnership. However, the LLC can also be formed as a “manager-managed” entity, wherein the owners who are also the managers control the business, while the owners who are not managers act in a capacity similar to limited partners.”

The LLC can be the perfect tool for real estate investors looking for limited liability and tax planning; it can also be a good choice for small business owners and licensed professionals thinking about succession planning. For more information contact our office.