This is the final part of our series on Entity Structuring Questions and Answers.
QUESTION: “A client came to me and asked why he did not get any stocks from an LLC. I told him that LLC does not issue stocks. He told me that he once went to an attorney to set up an LLC. He keeps insisting that the attorney told him he would have such and such amount of stocks in that LLC. Am I missing something?”
ANSWER: You are missing what is commonly called “Units of Membership”,” Units of Ownership”, or “Membership Certificates”. They look like shares of corporate stock and result in basically the same as shares of corporate stock. I have made them in the past for a client with my PC.
QUESTION: “I have never heard of these certificates for LLCs. Is this unique for certain states or just window dressing for clients who want something on paper?”
ANSWER: It is window dressing. Just like “stock certificates”. How many small corporations do you know of actually have a piece of paper that designates the number of shares they own?
QUESTION: “I have just completed my real estate broker course and am waiting to take the state exam. I already set up an LLC a couple of years ago to buy and flip properties. If I do set up my own real estate brokerage office as opposed to working with a non-licensed partner, will it be ok to use my existing LLC to buy sell, and broker properties, or do you recommend setting up a new separate LLC?
ANSWER: This is ok to maintain history as long as you originally set up the LLC right by not using your home address or yourself as the resident agent. These are asset protection busters. You would only need to update your operating agreement for the new brokerage office. The only other consideration is if you plan to keep buying and flipping properties, then at some point, you may want to spin off one of your businesses into its own separate entity to keep liability for each business separate.
QUESTION: I’m in Virginia and considering the purchase of a rental property in an all cash deal. What are the advantages/disadvantages of just structuring the deal under my name only and not a Trust or LLC?
ANSWER: You may need to check what VA laws are on deed transfer. If there are no transfer taxes in the state of VA from an LLC back to an individual that owns the LLC, then the fees to get this property back into your name if you need financing is minimal compared to the asset protection you get with having it in an LLC or Trust. I would prefer a trust because, with an LLC, Someone can choose to sue the LLC and still get something because now the LLC has equity in the property. LLC will protect you from personal liability but the LLC is now exposed because it had equity.
QUESTION: My partner and I just closed on our first property (a duplex). We are now looking into what type of entity we should create. We would like to create an LLC to hold the property, but the fees on a multi-member LLC in NY are too high to justify the cost. It is a $500/year filing fee plus the cost of startup. We were thinking of possibly creating a single member LLC in one of our names and quit-claiming the property into it. Then at a later time when we acquire more property, change our LLC into a multi-member with both of us.
ANSWER: Whether you form a single member LLC or a multi-member LLC does not change the filing fees as those are the fees for an LLC. However, I would not recommend having a Real Estate LLC be a Single Member LLC. Reasons: Taxwise, a single-member LLC files Schedule C for a business not involved in the ownership of the real estate and Schedule E for investment real estate. But both Schedule C’s and E’s are audit prone schedules and thus should be avoided. Partnership form 1065 is much less audit prone. Legally, a single-member LLC is more apt to have its veil pierced and in most states does not get charging order protection for a membership interest.
If the main concern is with the filing fees, then consider forming the LLC in a neighboring state such as PA although this does not give you the best legal standing but at least it saves you on the yearly filing fees.
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