Q: A friend has asked me to invest in a limited liability company to buy residential real estate. What is a limited liability company and is it a good entity to use to hold that type of real estate?
A: A limited liability company, or LLC, is a very popular form of entity for owning and holding residential (and other) real estate. A limited liability company shares many of the characteristics of both a corporation and a partnership.
Like a corporation, an LLC, if properly formed, capitalized, and maintained, can shield the owners from personal liability for LLC liabilities and obligations. This entity protection is not a substitute for prudent operation of the real estate and adequate insurance, but it does provide you and your friend a layer of legal protection for activities related to the real estate investment. In other words, an owner of an LLC may be liable to others for his or her own negligence in maintaining the real estate, but then he or she will not be liable by virtue of ownership alone.
Like a partnership, an LLC does not require many of the formalities usually found in the corporate context. In fact, like a partnership, the owners, or “members,” of an LLC can directly manage the LLC’s business unlike stockholders in a corporation who do not ordinarily have management rights except as directors or officers. Moreover, the management structure can be a little more “complicated” in a corporation than an LLC. Most corporations have stockholders, a board of directors that oversee the corporation, and officers that execute the day-to-day affairs. Additionally, it is a statutory requirement that a corporation hold annual stockholders’ and directors’ meetings.
An LLC does not need to have directors, officers, or meetings unless the owners make the choice to have them. An LLC gives members more flexibility in how they structure their organization and management and what formalities, if any, they want to include in its operation. With that said, it is common for an LLC with multiple, unrelated investors to incorporate some type of “corporate” formalities, such as meetings of members and having “managers” who function as directors and officers. In any event, the flexibility of your organizational structure is greater with an LLC than it is with a corporation.
In summary, an LLC can serve as a perfectly good vehicle for a residential real estate investment, provided that you plan carefully and seek the advice of professionals familiar with your situation, the type of investment, and LLC’s generally.