3 Top Reasons to Transfer Your Investment Property to an LLC
If you own real estate for investment purposes, it’s probably a good idea to put it into an LLC pursuant to the North Carolina Limited Liability Company Act, N.C.G.S. § 75D. Though there may be benefits to owning real estate as a corporation, or even in your individual name (always check with your CPA), an LLC is by far the most common way to own real estate. an LLC provides an extra lawyer of protection and insultation from potential liability, whether you have a rental house, a multi-family property, or even if it’s the building your business is in.
This post explains the 3 top reasons for transferring your investment property into an LLC.
1. LLCs are simpler than other business entities yet provide the maximum protection.
The fewer rules you have to comply with, the better. Setting up an LLC is simple, and unlike with a corporation, you are not required to have bylaws, you are not required to keep minutes, and you are not required to have annual meetings.
That said, LLCs should be maintained in compliance with the applicable rules under the North Carolina LLC Act. You may also want to draft an operating agreement (the contract that controls how the company is to be run) or other member/owner agreements. But, if you are face-to-face with a creditor trying to “pierce the corporate veil” and hold you individually liable for something the LLC is responsible for, having fewer requirements to comply with makes it easier for you to win.
2. LLCs permit just as much flexibility as corporations for allocating profits, losses, and control.
Do you have a partner in your LLC? Are there investors who need to be repaid out of the rent or sale proceeds? Do you have any partners who should (or should not) have additional control over the company?
If so, you can use an operating agreement to allocate all the resources of your LLC. You can allocate profits and losses in any reasonable manner, which includes the option to pay certain people more, or sooner, or less, or later than others.
Likewise, do you want a certain person to have veto power over major decisions? What if you are voting on an issue and you have a deadlock? And, do you want to eliminate (or add) duties of some of the LLC’s members to prohibit (or allow) them to own other businesses that might compete with your real estate investment?
If any of the foregoing is true – if you want to make special allocations of money and power – you can do it with an LLC. LLC’s are maximally flexible when it comes to dividing up the investment in whatever way is mutually agreeable, and mutually beneficial. The operating agreement that governs an LLC is, essentially, a contract that will be enforced so long as it is sign by the owners at the outset.
3. LLCs can be used to pass down property to family members or partners.
LLCs can be used as a way to do estate planning for investment property, too. Whether you are one person who owns an investment property and want to give it to your children, or whether you have a group of real estate investors who each wants to ensure that your respective spouses can take over your ownership if something were to happen, you can do it with an LLC.
How can you transfer property using an LLC? A qualified attorney can draft provisions in your LLC operating agreement that give non-controlling interests in the company to family members. The operating agreement would say that those non-controlling interests become controlling interests, and the family members are automatically admitted as members, if you were to die.
This helps to avoid probate, and allows the LLC to continue in existence after someone dies. Otherwise, when the owner of an LLC dies, it is very likely that the LLC would cease existence or may need to go through the long court-supervised probate process.
There are many ways that LLCs provide benefits to their owner, whether by allocating power, money, or providing insultation against creditors’ claims. The North Carolina LLC Act itself makes this clear, saying that the purpose of the LLC Act is “to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements.”
If you have an investment property, a rental, or a building that your business owns, it’s worth investing whether you can provide yourself, your partners, or your family, with power and protection they would not otherwise have.
Dye Culik PC is a Charlotte, North Carolina business law firm representing entrepreneurs, business owners, and real estate investors in everything from contracts to disputes. Contact us to see how we can help protect your investments.