There are many advantages to holding commercial or multi-family real estate within a limited liability company (“LLC”).
- Limitation of Personal Liability. While comprehensive liability insurance is a necessity for any property owner and will generally protect a property owner from common slip and fall liabilities, there are other liabilities that may not be covered or exceed the limits of an insurance policy. For instance, if you sign leases, services agreements, management agreements, non-recourse loan documents or have other contractual obligations in regards to the real estate, holding the real estate in an LLC avoids personal liability from such obligations.
- Pass Through Taxation. An LLC is not taxed separately from its owners. Any profits and losses are passed through to the owners of the LLC, so you would not get taxed twice on money made by the LLC like you would in a corporation.
- Estate/Succession Planning. If real estate is held in an LLC, passing on ownership interests to your heirs or additional owners can be handled at the LLC level, rather than having the cost and hassle of recording additional conveyance documents. Such conveyances are also not public information, so you have the ability to keep transfer and ownership matters private.
- Management Control. With an LLC you can incorporate governing documents that prevent further sale/transfer of ownership and outline management/use of the real estate. Having formal procedures in place prevents later issues and lawsuits amongst the owners.
Recent changes to the Minnesota Limited Liability Company Act more closely align with expectations of owners and other states’ existing laws, making it simpler to operate and more advantageous for a Minnesota limited liability company to own real estate. Some of the major recent changes to the Minnesota Limited Liability Act are as follows:
- Less Formal Requirements. You are no longer required to have a person acting as a Chief Manager or Treasurer under the new LLC Act and, under most circumstances, you are free to set up management and operation of the LLC as you see fit.
- Member Managed. There is no requirement to have a Board of Governors under an LLC. The default arrangement under the new LLC Act is that all of the owners have equal voting rights in the management and operation of the LLC. This prevents the headache of worrying about board approval, formal meeting minutes and other items generally reserved for corporations that oftentimes are not followed, and leaves the decision making to the owners of the LLC.
While recent changes to the Minnesota Limited Liability Company Act simplify an LLC’s operations, it is very important to ensure that expectations with respect to the management and operations of the LLC are properly documented. This is especially important, for instance, when there are unequal owners in the LLC. If one owner can outvote another, this will need to be properly evidenced within the LLC documents since the default rule is that all owners have an equal vote. Similarly, if there is an expectation that one owner receives a larger percentage of distributions from the LLC, this is contrary to the default rule in the LLC Act and must be changed within the LLC documentation.
This article merely touches on the material advantages of holding real estate in a Minnesota LLC. There are several other issues and concerns to address that should be properly documented and reviewed by counsel.
© 2016 Rinke Noonan