Why Buy an Apartment Building with LLC Title?
A multifamily property should not be purchased in an owner's name. It should be bought through a corporate entity, such as an LLC.
The primary reason LLCs are formed is to avoid personal liability for business debts. Creditors can pursue LLC bank accounts and other assets, but they cannot touch personal property of a manager or owners such as cars, homes, or bank accounts.
Conditions of an LLC
The liability of a corporate entity is limited to the interest in the property as long as the following conditions are met.
LLC corporations cannot commingle personal assets and corporate property. Courts disregard such LLCs as fiction and allow creditors to go after an individual's personal assets. Therefore, it is imperative that the owner of the LLC keeps all the property's assets separate.
A sole owner of an LLC, who does not plan to have outside investors, is not considered a security, and need not be concerned with security laws. Typically co-owned LLCs, which are actively managed by all the owners, are not considered securities.
Ownership interests that are considered securities must qualify for an exemption from federal and state security laws before initial owners of an LLC invest money. Most small LLCs qualify for exemptions from security laws.
Setting Up an LLC
Setting up an LLC is quite simple. An accountant or lawyer can draw up the documents to establish the corporation and send it in for approval. Often times, forming an LLC is a one-time fee. Depending on the type of LLC formed, owners can utilize inexpensive online services to form basic LLCs or hire accountants/lawyers to draw up more complicated LLC documents. Either way, the cost of forming an LLC varies drastically.
Managing an LLC
An essential element of LLC titles is that the managing partner is 100 percent liable for any and all action that occur regarding the LLC. Managing partners can be the owners themselves or designated by Investors who own the LLC. By hiring these managing members, Investors can act as limited partners of the LLC, which means that their liability is lessoned and limited.
An LLC that is well-managed is an opportunity for new investors to learn the business. Find people who own multiple multifamily properties and offer them a partnership. New investors, who choose this route, are essentially trading equity for less stress, strains and time demands. They are seeking passive investment with the potential upside in cash flow and appreciation, but without the headaches and hassles of direct ownership.
Some investors do not put properties into an LLC unless they own several properties. The perceived extra costs are sometimes a deterrent. Steven McDonnough, a financial consultant, makes a case for the need to put even one property in an LLC. He suggests consulting a financial consultant, attorney, or CPA to determine if the benefits outweigh the additional cost.