Using the California Limited Liability Company to Acquire Real Estate
In California the Limited Liability Company (“LLC”) is a hybrid business; it is an entity that has the attributes of both the general partnership and the corporation. While the members of an LLC enjoy the freedom of management that comes with a general partnership, they are also insulated from many of the attacks that could come from the LLC’s creditors to their personal assets, just as the corporate shareholder would.
In many instances, forming an LLC to acquire and hold real property is attractive, not only because of the limited liability of its members against the LLC’s creditors, but also because of the relative simplicity of forming the LLC. All that is required is that the LLC file Articles of Organization with the California Secretary of State. The members of the LLC must then enter into an operating agreement relating to the management of the LLC, in which the members agree on how the LLC will be managed. Management of the LLC is often easier than the corporation because it is may be managed by the members themselves, any number of the members, a single member-manager, or even a professional manager. Limited Liability Company (LLC), State of California, Franchise Tax Board.
A key feature making the LLC attractive to the real estate investor is the ease with which the LLC is maintained. Unlike the corporation which must follow the requirements of the California Corporations Code regarding annual meetings and management structure, the LLC is not required to hold meetings, and the members may agree on any management structure they choose in the operating agreement. The LLC does not need to have a board of directors to oversee major business decisions or have the officers required of the California corporation. An LLC can be formed by individuals, partnerships, corporations, trusts, or any combination of those entities. Is an LLC the Right Choice for my Commercial Real Estate Investment?, Phil Jemmett, Huffington Post Business, Oct. 11, 2013, updated Jan. 23. 2014.
Additionally, so long as the LLC is comprised of two or more members and has not elected to be treated as a corporation for tax purposes, it will pay no income taxes. Rather, the income, deductions, and credits of the LLC pass through to the individual members. Although California LLCs will pay an annual $800.00 minimum franchise tax and fee, all income will be paid by the individual members based upon their distributive shares. Limited Liability Company (LLC), State of California, Franchise Tax Board. Moreover, when the real property held by the LLC is sold, the sale is treated as the liquidation of a partnership and tax is determined under partnership law.
If you would like to arrange for a consultation to discuss the most appropriate, advantageous method for holding your investment real estate, or if you would like to discuss any other employment or business-related matter with a rising star, Michael Leonard, Esq. of San Diego Corporate Law should be your first call. He has the experience and knowledge to ensure all of your business agreements are enforceable in the California courts. He can be contacted by visiting San Diego Corporate Law or by telephone at (858) 483-9200.