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Know the Law: Set House Rules with LLC Status

Written by: Kara E. Dougherty

Published in the Union Leader (5/9/2016)

Q. My siblings and I will be inheriting a vacation home from our mother.  We earn disparate incomes and have already had arguments about what to do with the property.  Is there anything we can do to prevent these arguments and establish rules related to payments?

A. Placing the property into a limited liability company (“LLC”) may be suitable for your family’s situation.  An LLC is governed by an operating agreement, which can set forth the rules of the vacation’s home use and economic responsibilities of each member of the LLC (i.e. you and your siblings).  Documenting the use and financial expectations among your siblings at the outset of ownership can prevent future disputes.  An operating agreement can set forth the amount of time each sibling has sole access to the vacation home and describe the maintenance and upkeep responsibilities of each family member.  

Disparate capabilities of contributing economically to the vacation home can be addressed in a number of ways, including tying the amount of time a member may use the vacation home to his or her financial contribution to the LLC.  In addition, shares in the LLC are typically allocated based on the capital contributions of each member.  Therefore, a member who contributes more capital to the LLC will receive a greater portion of proceeds upon a sale of the vacation home.  However, cash is not the only barometer for ownership percentages.  A member with limited funds may devote additional time to the property’s maintenance in exchange for equal shares in the LLC.  The operating agreement may also permit a member to rent the property to third parties during his or her designated period of use.  This arrangement not only brings rental income into the LLC but also enables the members to take advantage of the liability protection that an LLC affords its members. 

Mechanisms can also be put in place to address disputes regarding when to sell the property.  A sale of the vacation home may be conditioned upon the unanimous approval of the members.  Alternatively, a buy-sell provision sets forth the process, price and terms of a member’s sale of shares in the LLC in the event that a sibling desires to sell the vacation home but the others do not.

LLCs with multiple members can be taxed as partnerships or corporations and this flexibility warrants a conversation with tax counsel to ascertain the most appropriate tax structure for your situation.  Professional counsel is also recommended to help your family address additional considerations such as real estate transfer taxes and maximal estate planning strategy.

Kara can be reached at [email protected].

Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association.   We invite your questions of business law.  Questions and ideas for future columns should be addressed to:  McLane Middleton, 900 Elm Street, Manchester, NH 03101 or emailed to [email protected].  Know the Law provides general legal information, not legal advice.  We recommend that you consult a lawyer for guidance specific to your particular situation.

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