Real estate investors increasingly use LLCs to protect their personal assets

Crowdfunding is best known by some as the means used to bring the canceled TV show Veronica Mars to the big screen. However, crowdfunding is also being used as a means of raising money to invest in commercial real estate. The Wall Street Journal recently reported that dozens of crowdfunding sites now offer individuals the opportunity to invest in commercial properties. A person who is affiliated with the crowdfunding research program at the University of California at Berkeley was quoted as saying that real estate has suddenly become the "hottest sector" in crowdfunding.

Not every real estate project lends itself to crowdfunding. Regardless of how the purchase of commercial property is financed, investors need to decide what type of entity will be formed to take and hold title to the realty. According to the American Bar Association, some of the entity options include joint ventures, partnerships, land trusts, subchapter C corporations and limited liability companies.

The author of an article published in the Huffington Post observes that protecting personal assets is often a matter of great importance for those who invest in commercial real estate.

As a result, more and more investors in realty are now utilizing limited liability companies to protect their personal assets. An investment expert was quoted as saying that a major advantage of an LLC over a partnership is that the liability of LLC members can be limited to their financial investment. In some partnership arrangements, lawsuits or foreclosures could threaten the owner's personal property. However, LLCs offer the limited liability protection of a corporation.

Another benefit of an LLC is that it offers "pass through" taxation allowing LLC members to report a company's profits or losses on individual tax returns. Corporation owners, by contrast, face "double taxation" in that income is taxed once on the corporate level and then again on the corporate owner's personal income tax statements. The State of California Franchise Tax Board observes that LLCs also offer more operational flexibility than do traditional corporations. For example, LLCs-unlike a corporation-do not issue stock and are not required to hold annual meetings or keep written minutes. LLCs are also simpler to form than a corporation.

A new LLC Act

As of January 1, 2014, the prior law governing California LLCs was repealed and replaced with the California Revised Uniform Limited Liability Company Act (RULLCA). According to the Across the Bar newsletter, the legislature's intent in passing the RULLCA was to make California's law more in uniformity with the other states and thus enable it easier for multistate businesses to operate in California.

There is no question but that the law governing LLCs was significantly changed by the RULLCA. The author of the article in Across the Bar suggests that, in order to avoid unintended consequences resulting from the new law, new LLC operating agreements should be drafted with the RULLCA in mind. Moreover, some pre-2014 LLC operating agreements may need to be amended in order to address changes in the law.

Seek legal counsel

Regardless of whether you are going to set up a company to invest in realty or conduct some other type of business, you should contact a California attorney experienced in handling business and commercial law matters. An attorney can advise you on how to set up a business entity suitable for your endeavor and make sure that the correct documentation is prepared and filed.