Author: This article was originally published by Malecki Brooks Ford Law Group, LLC. To view the article, click here.
Your business is thriving and you find a piece of real estate that would make an ideal long-term office location. Now that you have made such a significant business decision, you will want to take all the steps necessary to make sure that investment is protected. Creating a new entity to hold title to the real estate is the most important step you can take in this process. While there are different types of entities that can be formed for this reason, an LLC may be the ideal entity for the following reasons.
1. Limiting Liability and Protecting Assets
The first reason to hold the real estate in an LLC is to limit your liability and protect your assets – both personally and for your business itself. For example, say a patient slips and falls outside the front door of your new office location, sues for damages on the basis of negligence, and wins a judgment. If the real estate is owned by you personally, that patient can reach your personal assets, including bank accounts and personal items, in order to satisfy that judgment. Similarly, if the real estate is owned by the business itself, that patient can reach the business’s assets to satisfy the judgment.
On the other hand, if the LLC holds title to the real estate, that patient can only look to the assets of the LLC in order to satisfy the judgment (barring any gross negligence or willful misconduct by your business or you personally or any failure to observe corporate formalities). By creating an LLC to own the real estate, you have separated and shielded your personal and business assets from liability related to the real estate itself and you have limited the possible liability to just those assets the LLC holds.
2. Potential Tax Benefits
Another reason to hold the real estate in an LLC is for potential tax benefits. Contrary to a corporation, which has two layers of taxation, income earned on LLC owned real estate passes through to the LLC owners directly. This is particularly nice for a single member LLC (owned by one person) as the LLC taxation default is to report the income derived from the single member LLC directly on the sole member’s individual tax return. In this instance, you do not have the burden of preparing a corporate or partnership tax return for just the real estate.
That being said, before forming an entity you should always consult with a tax professional to ensure that you are receiving the maximum tax benefit allowed under the law while also complying with any applicable IRS self-rental rules.
3. Flexibility
A third reason why an LLC is an attractive mechanism to hold title to real estate is that an LLC allows for flexibility in ownership. Many of our clients are healthcare professionals and own their own practices. Under Illinois law, there are restrictions on who can own these practices. Those same restrictions do not apply to ownership of real estate. This allows you to potentially bring in new investors/partners when purchasing real estate. For example, you and I, your friendly neighborhood attorney, can jointly own an LLC holding title to a two-unit building – one for your practice and one for my law firm. I could not, however, invest the same money as I would for the real estate and become an owner of your practice.
Additionally, we occasionally have to burst a client’s bubble and advise that he cannot make his practice a family business unless his spouse or children are also licensed as allowed under Illinois law. But wait! The family members CAN all be owners of the LLC that owns the practice’s real estate. This leads to the next point.
4. Retirement and Estate Planning
There will come a day when you no longer want to own and operate your business. If the LLC owns the real estate, you will have the option to only sell the business and its assets while still retaining ownership of the LLC. Here, the new business owner can continue to rent from the LLC, which will continue to bring in rental income after your retirement. Also, this allows you (and potentially your family members), as a member of the LLC, to have an interest in a hopefully valuable piece of property that you can sell at the top of the market. Profiting off a real estate sale can further cushion your nest egg or provide your family members with some of the benefits you wished you could have provided by giving them an interest in your practice.
One final item to keep in mind is that if you decide an LLC is right for your situation, then you must have a lease agreement in place between your business and your LLC. Keeping these two entities at arm’s length with a documented lease agreement is crucial to maintaining and observing corporate formalities.
Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.
