Can You Purchase Property Through an LLC?

 Posted on October 07, 2022 in Business Law

A real estate investor asked whether it was acceptable to purchase property through an LLC. The answer is “Yes”. The mortgage will be personally guaranteed by the members of the LLC (or owners of the LLC). The property deed can be titled in the LLC or otherwise known as the Limited Liability Company. Members of an LLC are the owners of the LLC. The owners of a corporation are shareholders. LLC members appoint managers to run the rental property business.

The LLC members pledge their personal assets as collateral to back the lender’s debt. Mortgage companies lend to individual owners of the LLC. The LLC may appear on the title to the rental property. However, the LLC members personally guarantee the mortgage and note. 

Benefits of Setting Up an LLC for Real Estate Investors or Landlords?

There are three major benefits of setting up LLCs for rental property. The three benefits are the following:

• Personal Liability Protection from rental property debts (other than the mortgage and note done by the lender)

• Pass-Through Tax Treatment to Each Member’s Individual Tax Return (“Pass Through Entity”)

• Management Structure is fluid because members appoint managers to operate the day-to-day rental property business

Personal Liability Protection

Personal liability protection is the major benefit of an LLC. Personal liability protection insulates one’s personal assets from their business or rental property liabilities. The real estate investor or landlord are concerned about major liability concerns, which threaten their family and economic security. The LLC maximizes limited liability protection, which enhances a family’s economic security. Creditor concerns are minimized or eliminated, and a family’s peace of mind are strengthened. 

An umbrella insurance policy is strongly recommended because it gives a real estate investor or landlord additional protection against unforeseeable claims. An umbrella policy provides gap coverage when liability limits are met.

Gap insurance coverage means insurance coverage that is not covered by existing policies. Consumer fraud concerns is a major gap coverage, which is uncovered by any type of insurance coverage.  Business litigators will claim consumer fraud or deceptive business practices to maximize gains by their plaintiffs. Business litigators will identify facts, which lead to the biggest damage awards (whether the rental property owner did anything wrong).

In addition to an umbrella policy, an LLC is strongly recommended for real estate investors and landlords. The LLC provides additional protection because fraud concerns or other liability concerns are designed to provide protection against personal liability concerns. Business litigators understand that owners of an LLC have personal limited liability protection. 

Business litigation attorneys will argue novel theories to add additional liability claims and increase the exposure of Defendants (who happen to be owners of an LLC or own property in their personal names). The goal of a business litigator is the maximize the gains of their clients. The Illinois Consumer Fraud and Deceptive Business Practices Act is a primary method for business litigators to argue that an owner of an LLC should be personally liable for a lawsuit brought by a Plaintiff. Setting up an LLC is a major obstacle for business litigators in protecting a real estate investor or landlord’s personal assets (from liability concerns).

Tax Treatment is “Pass Through” Meaning Appears on One’s Personal Tax Returns

The LLC is taxed similarly to a partnership or individual’s tax concern. “Pass through” treatment means that the LLC’s corporate business structure is ignored for “tax reasons”. The tax structure is a disregarded entity because the business entity is ignored for tax purposes. Simply put, “pass through” tax structure means that the tax benefits and liabilities are pass through to one’s personal tax return through a Schedule of a personal tax return.

A schedule is a section of one’s tax return that gives specifics about tax deductions and profits of an LLC. Each partner or member will report their share of an LLC’s tax reporting requirements to their own individual tax return. The owners of an LLC are called “members,” and the “managers” of an LLC are appointed by the members to operate the day-to-day business of the LLC.

Pass-through entities avoid double taxation of C corporations. LLCs may be taxed as partnerships or S corporations. Generally, the facts of a member’s unique tax situation will depend on how the LLC is taxed. We normally recommend that members of the LLC consult their account for additional consultation on the issue of taxes (in addition to the attorney’s recommendation). In our experience, each accountant and CPA has their individual preferences.

Management Structure of the LLC

Similarly, to corporations, an LLC’s governance is managed by Managers or Members depending on their specific type of LLC structure. There are generally two types of management structures for LLCs. The first and most common management structure is a “Manager-Managed LLC”. The second type of management structure is a “Member-Managed LLC”. 

A Manager-Managed LLC is managed by the managers who are appointed by the members or owners of the LLC. A Corporation generally has the shareholders appoint a Board of Directors that govern the day-to-day business affairs of the Company. An LLC and Corporation are similar because a Manager-Managed LLC is run by the Managers. The benefit of the Managers is a husband and wife run LLC (rental property) may have only one member (husband or wife) and two managers (husband and wife). The goal of this business structure is to minimize a family’s liability concerns with respect to property ownership. A manager-managed LLC is the most common business structure for LLCs.

The second type of business structure is a “Member-Managed LLC”. A Member-Managed LLC is run by the members or owners of the LLC. The members do not appoint managers to run the day-to-day business operations. Member managed LLC members could bind the LLC in contractual agreements and to run the day-to-day business affairs of the LLC.

Kendall County Business Formation and LLC Attorneys

At Gateville Law Firm, our business formation and LLC attorneys assist rental property owners with start-up and business formation concerns. Whether you want to set-up an LLC or seek guidance on the set-up of muti-party entity formations or seek our start-up business counsel, Gateville Law Firm is your law firm. Call us today at 630-780-1034 or via online contact form. We serve real estate and the business community near Oswego, Plano, Yorkville, Sugar Grove, Morris, Minooka, Newark, Shorewood, Bristol, Morris, Plainfield, Joliet, and nearby communities.