Setting Up Real Estate Business as LLC
Ask the Real Estate Lawyer: Real Estate Law Q&A
REM # LAW 670
By Ilyce R. Glink and Samuel J. Tamkin
Summary: Thinking about buying and flipping
low-end housing for a profit? Ilyce and Sam explain how to set up a business
to protect you and any partners you wish to include.
Q: A few business partners and I are considering starting a limited liability
company to purchase lower-end housing.
(article continues below useful links)
We would invest a few thousand dollars to update and then resell these homes
at a profit.
What is the best way to research how to set up this company?
A: There are several vehicles you can use to start a business. One of them
is to do business in your own name and the names of your business partners.
Most people would not recommend that you do it that way.
The second is to set up a limited partnership, corporation or limited liability
company. For real estate purposes, most people agree that a limited liability
companies gives its organizers the most flexibility in terms of structure and
for income tax purposes.
Whether you chose a limited partnership, corporation or limited liability company
(LLC), your aim is to have a vehicle that will insulate you in case problems
develop with your venture. These problems can involve litigation with third
parties or even creditor problems. In each case, the entity you choose should
shield you from creditor’s claims should something happen.
An LLC shields its members from claims from creditors and litigation matters.
The LLC also permits the tax benefits of the LLC to flow directly to its members.
If you take a large corporation, corporation’s income is generally taxed
and its distributions to its shareholders are also taxed as dividends when the
shareholder receives them. While there is another type of classification for
federal income tax purposes for small corporations, this other classification
does not afford owners the flexibility of an LLC.
To form an LLC, you should consult with an attorney who specializes in forming
companies or you can do it yourself with some of the do-it-yourself kits that
are available over the Internet.
But whatever you do, make sure the organizational documents you have contain
provisions to help you and your partners sort out the many issues that can arise
with the co-ownership of the company, including breakups, decisions that can’t
be made, death of a member, bankruptcy of a member, divorce, and sale of an
interest in the LLC.
If you don’t have these provisions in your documents, you may find yourself
in a situation that could have been prevented but later causes greater harm
because no one is willing to work with you to solve the problem and you don’t
have a document to help sort out the mess.
Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce
R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your
Home Faster and For More Money In Any Market. If you have questions for
them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022
or contact them through Ilyce’s website www.thinkglink.com