Pros & Cons of LLC’s

Atlas Real Estate Advisors  /   December 16, 2018

Utilizing a Limited Liability Company (LLC) for commercial property ownership offers numerous advantages, such as asset protection, tax benefits, and management flexibility. However, there are potential drawbacks and challenges as well. In this comprehensive guide, we explore both the pros and cons, providing you with a deeper understanding of how a limited liability company can impact your investment property ventures. 

What are the pros to LLC’s for your real estate investing?

1. Protects Personal Assets
2. Flexibility in Membership
3. Pass-through Taxation
4. Flexible Pass-through Structure
5. Enhanced Protection with Multiple LLCs
6. Management Flexibility
7. Contribution of Personal Assets
8. Easy Transfer of LLC Interests
9. Professional Business Image

Utilizing a limited liability company  form of ownership for your commercial property offers protection for personal assets by isolating business assets from potential lawsuits. Additionally, LLC’s allow for single or multiple members, enabling individual investors to enjoy the benefits and protections that come with this legal structure. Members can be added at anytime, simply by updating the Articles of Organization and reflecting those changes in the Operating Agreement by defining member roles, decision-making processes, profit distribution, member turnover, and share transfers.

From a tax perspective, LLC’s are often treated as pass-through entities, meaning profits and losses flow through to each member’s personal tax returns. This flexibility extends to the allocation of profits and losses, which can be customized beyond ownership percentages to suit different tax strategies and preferences. 

Carefully crafted operating agreements provide management flexibility by assigning property management responsibilities or requiring member voting for significant decisions. Many real estate investors choose to establish separate LLC’s for each rental property to ensure that potential claims and liabilities are isolated to the individual properties rather than affecting the entire portfolio. 

Finally, members can contribute personal assets, such as real property or funding, to the LLC, expanding commercial investment opportunities and leveraging existing resources. Lastly, LLC’s enhance professionalism, instilling confidence and credibility among tenants, lenders, and vendors.

What is the downside to all of this? 

1. No Guaranteed Asset Protection
2. State-Specific LLC Requirements
3. Additional Filing Fees & Filings
4. Due-on-Sale Clause & Transfer Taxes 
5. Potential Self-Employment Taxes
6. Financing Challenges

While LLC’s provide asset protection, it’s important to note that it’s not foolproof. In cases involving fraud or negligence, individual members can still be held liable. Investors with diverse portfolios will need to establish LLC’s in each state where they own property, thus incurring additional costs, and most states require annual or bi-annual filing fees to maintain active LLC status. 

It is important to speak to your attorney, lender and accountant before making a change, because moving existing investment properties into a newly formed LLC can potentially trigger  due-on-sale clauses on the loan, or result in transfer taxes imposed by each city, state, and county.