A real estate investor recently asked me whether she should form a LLC to purchase a residential investment property in New York.
Some of the advantages of forming a LLC are obvious. First and foremost is liability protection. If there is a claim not covered by insurance, the LLC shields the individual members from liability thereby protecting their personal assets.
Second is confidentiality. Some owners of rental properties may not wish the tenants to know their personal identities. Other owners may wish to remain anonymous for personal reasons.
Third is tax benefits. If the owner treats the LLC as a disregarded entity for income tax purposes, the owner can receive the benefit of liability protection without incurring additional tax liability associated with other business entities.
Fourth is flexibility to add current and future investors. Drafting and amending an Operating Agreement and drafting membership transfer agreements is relatively fast and inexpensive. It should be noted however that the transfer of a controlling interest in real estate may trigger transfer taxes.
Last, for investors involved in multiple properties, forming a special purpose entity to hold title to a particular asset can help insulate the other assets. In other words, one bad apple doesn’t spoil the bushel.
Now for the disadvantages.
First, there is cost and timing. Obviously forming a LLC is more expensive and can be slightly more time consuming. In many cases the incremental difference in cost and timing does not outweigh the benefits outlined above.
Second is financing. Holding title as a LLC could impact financing and/or trigger the need for personal guarantees. Therefore, we generally recommend notifying the lender early in the process.
Of course, each investor and each transaction is different. Experienced real estate attorneys counsel clients to ensure they have all the facts and can therefore make informed decisions.
For more information on business entity formation or other related real estate issues, please contact us at (914)338-8050.
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The Law Offices of Keith R. Betensky, Esq.
The Empire Building
26 Village Green, Suite 4
P.O. Box 22
Bedford, New York 10506-0022