What is an LLC, and Why Use an LLC to Hold Property?
An LLC is a type of business entity used to operate a business. Limited Liability Companies (LLCs) can be formed by individuals, partners, or groups. The owners of an LLC are called “members,” and one or more of the owners may also serve as the manager of the LLC – or you may have someone who is not an owner serve as the manager. A principal, but not the only, advantage of an LLC is its limited liability protections. For example, debts of the LLC are not pursued through its members or owner since the LLC, as a company, is a separate entity. And the reverse is true as well – the LLC does not bear the burden of a member’s or owner’s individual debts. An LLC also provides flexibility regarding federal taxes, ownership and the number and types of members. Although more complex than a sole proprietorship, an LLC is still simplistic in operation, maintenance, and performance while offering a measure of protection to members and owners from liability. The LLC is one of the most popular vehicles for protecting assets, including real estate.
Primary Benefit of Property as an LLC; Protecting Yourself from Liability
By starting or joining an LLC, you separate yourself, individually, from the business. As described above, once your business becomes an LLC, it too becomes its own entity for legal purposes. Despite owning the LLC, you and the other assets that belong to you, individually, do not belong to the LLC, and you, individually, are not responsible for the liabilities that might arise from the assets held by the LLC. Therefore, aside from severe wrongdoings or offenses you may have caused in your capacity as a member or manager of the LLC, the LLC is accountable for its own lawsuits, debts or other ramifications incurred or inflicted by the property or operations of the LLC. As a result, purchasing new real property in or transferring real property you own to an LLC is beneficial, even more so if you intend to rent or are even considering renting or leasing the real property.
To illustrate the benefit further, imagine you currently own piece of property that is not an LLC. A guest, a visitor, or even a passerby, could be entitled to pursue legal claims against you for injuries if they are injured while visiting the property you own, even if you have never met the individual. Insurance could cover some of the damages, but often these situations surpass the maximum coverage amount. Someone can fall on your property, claim it was due to a lack of maintenance, and suddenly you, the owner, face a personal injury suit, and your personal assets become vulnerable.
However, if the property in the example above is owned by the LLC, any liability and financial burdens should fall on the LLC alone. The lawsuit would name the LLC as the defendant, not you. Moreover, solely the LLC’s assets should be responsible for monetary damages if the case succeeds. In other words, your personal assets would remain safeguarded.
Note: You must ensure the titles and deeds are appropriately transferred to the LLC, and other formalities of operating an LLC are followed. It is best to seek the counsel of a skilled Nevada LLC attorney when creating an LLC, especially when dealing with valuable assets.
Creditors and Holding Property in an LLC
Generally speaking, should a judgment be entered against you, individually, property and other assets held within an LLC cannot be seized directly by creditors to pay off your personal debts or other liabilities.
In the event that a creditor seeks to satisfy a judgment via LLC assets, a charging order is necessary. Charging orders instruct the LLC to distribute the debtor-member’s portion of a distribution of profits to be made by the LLC to the creditor, instead of to the debtor-member. In the charging order, the creditor is not authorized to manage the LLC or entitled to collect anything other than what the debtor-member would receive by way of a distribution from the LLC. However, obtaining a charging order and making a debtor-member distribution do not happen easily or quickly. Accordingly, forcing the creditor to wade through this process in and of itself provides protection. Creditors are typically after easy liquidity.
In addition to forming an LLC, by seeking the aid and experience of a Nevada Estate and Trust Attorney, you may discover additional ways to protect your assets. For example, in addition to the security and peace of mind an LLC brings, you may wish to add to it by considering an Asset Protection Trust.
Tax Benefits of an LLC
Tax flexibility is one of many benefits of forming an LLC in Nevada, whether considering a single-member LLC or one with multiple members. For single-member LLCs, the LLC can be disregarded for income tax purposes. Multi-member LLCs can be taxed as a partnership, or choose to be taxed as a corporation, keeping tax preparation and filings separate from the members.
Multi-member LLCs’ tax benefits and ownership percentages are clearly defined by an operating agreement among the members. Additionally, defined management responsibilities can be defined as part of an LLC operating agreement. An LLC offers tax benefits such as the ability to deduct expenses associated with the LLC’s property (e.g., property upkeep costs, utilities, etc.) at a company level. Meanwhile, net income is passed through to the individual members, resulting in taxation at the individual level. In Nevada, LLCs have no state-level income taxes.
Starting an LLC; The Next Step
If you are considering an LLC for your property or other assets, consult with an experienced Nevada Trust and Estate Attorney to determine and design the best path forward. We invite you to schedule a free and confidential consultation to have your basic questions addressed.
Attorney Kennedy Lee practices in all aspects of trust and estate law. He views all legal issues from multiple angles (e.g. from litigation to administration point of view) to provide a higher quality of service to our client.