ADVANTAGES OF AN LLC FOR REAL PROPERTY OWNERS

 

 

If you own real property (other than your homestead), establishing an LLC should be considered an integral part of your overall estate plan, inasmuch as an LLC will offer asset preservation that is superior to an S or C Corporation.

In the event you have already been sued, the fact that a particular parcel of real property is involved in the lawsuit does not, in and of itself, preclude transferring it into an LLC.  However, that parcel of real property, as well as any other parcels transferred to an LLC following the initiation of a lawsuit, may cause such LLCs to be dismantled by the Court if  considered to be a fraudulent transfer under the Fraudulent Conveyance Statute in Florida.  Therefore, if you currently own real property, whether vacant or occupied, you should give serious consideration to transferring your non-homestead real property to an LLC, now, before a threat arises.

If you own real property in another state, it can be conveyed (with a new deed) by an attorney licensed in that state to a Florida LLC, provided the laws of that state do not prohibit such a transfer.  However, certain states require that documentation remain on file in the state where the real property is located, such as registering the Florida LLC as a foreign LLC, filing an annual report, and paying any required fees.

For the “Do-it-Yourselfer”:  If any of your properties are mortgaged, you need written approval from the lender before transferring title to the property to your newly created LLC.  If a lender refuses to grant permission for the transfer of a mortgaged property to your LLC, then you may want to consider using a property already in your LLC (if you have one) as collateral for a loan, in order to generate the cash necessary to pay off the mortgage on the property that your lender would not allow to be transferred to an LLC while still mortgaged.

 

Compare the use of an LLC to a corporation with shares: When a person is the shareholder of an S or C Corporation, the shareholder’s shares can be confiscated to satisfy a judgment, never to be returned to the shareholder.  In the case of an S or C Corporation creditor, if the value of the shareholder’s shares is insufficient to satisfy the judgment obtained by the creditor, the creditor can satisfy the remaining portion from any other asset – personal or business – of the shareholder.  On the other hand, when a person is a member of an LLC and owns the majority of the LLC’s units, a creditor obtains what is called a ‘charging lien’ against the member.  However, this charging lien only entitles the holder to “stand in the shoes of an assignee”, that is, someone who received their interest by way of “assignment.” This means the judgment creditor will have to wait in line, until all of the LLC’s expenses have been paid, including the members’ salaries. Only net income can be used to satisfy a charging lien.  Additionally, because a charging lien holder (creditor) stands in the place of an assignee, the creditor will have no voting rights, cannot compel a distribution, or wind down the LLC (unlike an S or C Corp creditor), but… they have the ‘privilege’ of paying their proportionate share of taxes!

Most multi-member LLCs are taxed as a partnership; this means that the concept of pass-through taxation applies, which in turn means that the LLC member gets taxed individually on the net income (income minus expenses), and that there is no corporate tax due (no double taxation).

Although “single-member” LLCs are valid in Florida, the case law seems to show that they do not offer the same asset preservation as a multiple-member LLC.  Therefore, in order to maximize the protection offered by an LLC, it is best to create a multi-member LLC.  Even if one member holds the overwhelming majority interest (i.e., 98%), and the other holds what may seem like an insignificant minority interest (i.e., 2%); this appears sufficient to remove the question of whether a single-member LLC and it’s individual member, are one and the same.

As part of your estate planning, your revocable living trust would hold your shares (units) in your LLC and upon your death, your trust would provide instructions for how to distribute your shares (the LLC may also have a Member Operating Agreement to control the units on death, divorce or disability). The selection of a successor trustee for your revocable living trust should include consideration of a corporate trustee (e.g., Northern Trust, SunTrust, etc.) to assure that someone with the ability to manage your LLC is involved with your trust.

If you are unmarried, please repeat after me. . . “I will have a Prenup before I get married.” Repeat again. This is the only way to protect your assets, including your LLC, from a possible future ex-spouse.

As far as the fees and costs involved for establishing an LLC, attorneys generally base their fees on an hourly rate.  While the costs to establish an LLC can vary, some of the current approximate costs are as follows: 1) $125.00 – filing Articles of Organization and naming a registered agent for service of process (who can be either of the members or a third person, provided such registered agent is located in Florida); 2) $90.00 – LLC Book (with official seal and unit certificates); 3) $138.75 – filing the Annual Report with the State of Florida.  In addition, an Operating Agreement, Organizational Meeting Minutes and Annual Meeting Minutes are required in order to keep “corporate formalities” (necessary to show that your LLC not only has a business purpose but operates as a real business), and, your LLC will also need its own EIN (Employer Identification Number) and a business checking account into which revenues must be deposited and expenses paid from.

 

Therefore, if you own real property other than your homestead, and are concerned about being sued by a tenant, contractor or trespasser, then you should consider creating a Limited Liability Company (LLC) for each parcel of real property, since recovery by the person filing a suit against you, if successful, would be limited to the property in that particular LLC alone.

 

 

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