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    Benefits of Forming a Limited Liability Company for Commercial Real Estate or Rental Property Owners

    Have you recently inherited real estate which you intend to rent to the public? Do you own a small business which operates out of real property which you own personally? Perhaps you have invested in rental properties. In all of these scenarios, we have all too often seen clients who hold the real estate in their own personal names. Owning commercial real estate personally can be a risky proposition because once an individual does business with the public and/or has an employee, he or she is opening himself or herself up to legal liability, including tort claims (e.g. personal injury) and contract liability. This article discusses forming a limited liability company to own and hold title to the real property to protect the owner’s personal assets.

    What is a limited liability company?


    A limited liability company is a relatively new form of business organization that has been growing in popularity for small business owners and owners of real estate properties. It is a flexible legal entity that combines the pass-through taxation of a partnership (or sole proprietorship) with the limited liability of a corporation. Limited liability companies do not have the same “corporate formalities” as a corporation. For example, there are no requirements to hold annual meetings of equity owners, operations may be placed under the control of one or more individuals (known as “Managers”) rather than having a board of directors. So operating and managing property out of a limited liability company generally would not place much administrative burden on property owners.

    Formation of a limited liability company.

    In Massachusetts, limited liability companies are relatively easy to form. A Certificate of Organization must be filed with the Secretary of the Commonwealth, Corporations Division and a $500 filing fee must be paid. The Certificate of Organization must state the name of the entity, the address of the limited liability company in Massachusetts, the name and address of the resident agent for service of process (which must be an individual resident of Massachusetts, a Massachusetts corporation or a corporation qualified to do business in Massachusetts), the date of dissolution, the name and address of any managers, the general character of the entity’s business, and the name and address of any other person who is authorized to sign documents and recordable instruments in real property. Once a limited liability company is formed, minimal annual maintenance (annual reports with a $500 filing fee) is required.

    Protects Personal Assets

    Limited liability companies provide limited liability protection to their owners (or members). Under Massachusetts law, the debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are generally solely the debts, obligations and liabilities of the limited liability company. Further, no member or manager of a limited liability company is personally liable, directly or indirectly, including, without limitation, by way of indemnification, contribution, assessment or otherwise, for any such debt, obligation or liability of the limited liability company, solely by reason of being a member or acting as a manager of the limited liability company. Note, however, that there can be certain exceptions to the general rule that members are not liable for the obligations of the limited liability company, including, for example, liability for payroll taxes due to the IRS and/ or liability for fraud.

    Assume for example that a real property owner (an individual) is sued by a renter for a slip and fall accident on a property for which the owner (individual landlord) was responsible for the upkeep. If the property were held by the individual, the renter would be able to pursue the owner’s personal assets, such as his or her house and savings accounts, etc. However, if the property were held in the name of a limited liability company, that same individual would not be personally responsible and the renter would not be able to pursue the individual’s assets. The exposure of the individual would be limited to losing any assets contributed to the limited liability company (such as the real estate).

    Limited Liability Formalities

    In order to avail oneself to limited liability, it is essential that the owner(s) and the limited liability company maintain separate identities. In this regard, it is important to keep the affairs of the limited liability company and the managers and members separate. Assets and liabilities of the limited liability company should always be separate from the assets and liabilities of its members and managers. The limited liability company’s funds should not be used for the personal benefit of its owners. The managers of the limited liability company should open and maintain separate financial books and records, and open and keep separate bank accounts for the LLC. Intermingling of personal and limited liability company funds, property and transactions should be avoided. The managers should only use the business checking accounts and business credit card accounts for business expenses and should not pay personal expenses out of the company checking accounts. Efforts should be made to ensure that the limited liability is adequately capitalized to pay its basic expenses. There should be paper trails for any contributions or distributions of capital by and/or to the members and such transactions should be tracked by an accountant in the members’ capital accounts. All contracts and leases involving the real property and the limited liability company should be signed in the name of the limited liability company. Insurance policies should be held in the name of the limited liability company and paid for by such company. If individual owners have owner’s title insurance policies, a change endorsement naming the company as the new owner of any real estate property should be reported to the insurance company.

    Transfer of the Deed

    In the event you hold real estate in your name individually and would like to avail yourself of better personal protection, you will also need to transfer the property from yourself to the limited liability company. If there are no mortgages on the property, this would entail a straightforward deed recording at the appropriate Registry of Deeds with the changes in the insurance policies and title insurance as noted in the paragraph above. In the event that there is a mortgage on the property, the lending institution will need to be contacted in order to alert them to the transfer and, in such cases, the lending institution may require additional agreements be put in place.

    We are available to assist business and property owners form new limited liability companies and transfer their real property into such entities in order to help protect the assets of the property owners. If you need assistance or would like to discuss these matters, please contact us at any time.

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