Limited Liability Companies are relatively new as far as business entities are concerned. LLC’s (Limited Liability Companies) are created under state law and until a few years ago were not universally accepted. Because they are so new, there is no uniform treatment of this entity among the various states. Despite this lack of uniformity, LLC’s have gained popularity because they are a “hybrid entity”. That means that LLC’s offer the advantages of both corporations and partnerships and even individual tax treatment for certain activities.
LLC’s are a fairly versatile entity when it comes to taxation and asset protection. This is because a LLC can elect to be taxed as a partnership, “S” Corporation, or “C” Corporation. From an asset protection standpoint, LLCs give you similar protection to that of a limited partnership. In other words, assets held inside an LLC are protected from the claims of creditors against the individual owners of the LLC. The business activities that take place inside the LLC subject only the assets of the LLC to liability. This means that business activities engaged in by an LLC’s will only expose the LLC’s assets to liability. The individuals who own the LLC do not need to worry about losing their personal assets because of the business activities of the LLC.
Disregarded Is King
Perhaps the most interesting thing about LLCs is the fact that the LLC may be disregarded for tax purposes in the case of a single-owner LLC. In English, this means that a single-owner LLC can own, for example, a personal residence. The benefits of an individual owning the personal residence may not be forfeited simply because the personal residence has now been placed into an LLC. At the same time, creditors of the individual owner of the residence may not be able to get at the personal residence in the event of a lawsuit and judgment. This gives the owner of the property the best of both worlds: the tax benefits with a high degree of asset protection.
Easy to Maintain
From a business standpoint, LLCs are great because they require minimal record keeping and can be managed without the use of a Board of Directors. This has caused many discussions in the legal field as to whether or not to afford an LLC the same protection as a corporation, which is typically more formal. The results thus far have been quite positive with LLCs being given similar treatment as far as protecting assets as a corporation even without the same standard of formality.
Real Estate Holding Vehicle of Choice
The LLC is the perfect entity to hold real estate long term. The LLC allows an investor to contribute and remove real estate from the LLC without incurring a taxable event. The LLC also will permit depreciation to flow down to the investor. Unlike Corporations in which a tax will be triggered upon removal of an appreciated asset, or losses can be suspended or disallowed, the LLC is truly the entity of choice for holding real estate. If rehabbing is your investment strategy of choice then consider a Corporation.