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Purchasing Real Estate in LLCs

George Warshaw of Warshaw, DiCarlo & Poncia, P.C. recently gave our office an update on how limited liability companies are being utilized in the purchase of real estate in and around Boston.  Here is a high level overview:

Limited Liability Companies are often used in real estate to own property. An LLC not only provides liability protection for its owners, but also is an essential estate planning tool that allows for the gifting and inheritance of ownership interests in the LLC. It may also provide estate tax savings for nonresidents who own real estate in Massachusetts. If structured in a certain way, an LLC may provide privacy in the ownership of property. 

Background. A limited liability company does not have the rigidity and structure of a corporation. It is not taxed as a corporation (unless it elects to be taxed that way) and there are no requirements for yearly meetings of the owners or observance of corporation formalities. 

An LLC is an informal structure that operates more like a partnership or sole proprietorship with added liability protection. In an LLC, a “manager” replaces the board of directors and officers, and usually has full (or near full) operational control of the LLC's business. Alternatively, the owners (also called “members”) may instead manage the LLC directly.

Like a corporation, an LLC organized in Massachusetts must be registered with its Secretary of State to exist legally. However, members do not have shares of “stock;” instead, they have shares of membership interests. 

Liability Protection. The premise of an LLC is that owners and managers of the LLC are not personally liable for the debts, contracts, and actions of its agents and members. That is generally true. However, a mistake many people make in contracting with a person or vendor is to fail to add “LLC” after the company name or indicate that the contract is made on behalf of an LLC. That failure may result in the person signing the contract becoming personally responsible for its performance and liable for its nonperformance.

Similarly, a person who deals directly with a tenant acquires personal liability for deceptive or unfair acts or practices committed by the person. A landlord or property owner must be careful not to incur personal liability in direct dealings with a tenant. 

Estate Planning. A member’s interest in an LLC is a personal asset. Like any personal asset, it must go through a probate court process to be inherited. For that reason, many LLC owners place their membership shares in a revocable or irrevocable estate planning trust and designate the trust as the LLC member in the records of the LLC. Assets held in estate planning trusts usually avoid probate and bypass a probate court process to be inherited or transferred to others.

An LLC may also have more than one class of membership interests, which can be divided between voting and nonvoting interests. That makes it easy to gift nonvoting shares of income and equity without giving up operating control of the LLC. That being so, the LLC is an ideal structure for a family vacation property to be owned and used by several generations.

Privacy. Few attorneys create LLCs to protect the disclosure of the identity of the members/owners. Anyone who views the Secretary of State's website and sees the name of a manager often rightly presumes that the manager is an owner of the LLC. However, since an LLC is not required to have managers (they can be managed solely by their members), an LLC merely needs to include in its filing the persons who have the right to sign/file documents on behalf of the LLC. The persons chosen for these roles could be the LLC’s attorneys rather than the owners, and then the names of the LLC owners will not appear in the records of the Secretary of State or the Registry of Deeds.

Conclusion. An LLC provides many advantages in the ownership of real estate. It also requires discussion and careful planning.

The preceding discussion is provided solely for general informational purposes. It is not intended and should not be considered as legal advice for your personal circumstances or planning. Laws change frequently, and others may view the content of this article differently. Only a private consultation with an attorney reviewing your situation's facts and circumstances will provide competent legal or tax advice. To learn more, please contact Attorney George Warshaw.


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