Limited Liability Companies

If you own rental property, it will benefit you to read this article.  It may even save you a significant amount of money.

A limited liability company (LLC) is a relatively new type of business entity in California.  Generally, the main benefits of an LLC include liability protection, the favorable way in which the business entity is taxed, and the flexible way in which the business may be structured.

Owners of an LLC are called “members” and in a properly formed LLC, generally, the owners/members are not personally liable for any liabilities or obligations of the LLC.

California limits the type of activities in which an LLC may engage.  Certain types of professional services providers may not form an LLC.  Additionally, some of the businesses prohibited from forming an LLC include doctors, accountants, veterinarians, attorneys, engineers, private investigators, firearm trainers, alarm companies, polygraph examiners, auto repair services, and martial arts teachers.  Generally, businesses listed in the California Business and Professions Code, which are required to be licensed, registered, or certified, may not operate through an LLC.

However, a common and effective purpose for forming an LLC is to hold title to rental property.  As we know, owning rental property carries with it many risks and potential liabilities.  Potentially, the liabilities which pose the greatest risk and exposure include someone getting hurt on the property, a fire or other damage to property.  Generally, owners of rental property may form an LLC and transfer ownership of the rental property to the LLC.  In this scenario, the owner of the LLC will insulate himself or herself from any personal liabilities associated with the LLC.

Some people who form an LLC enjoy the benefit of the relatively low administrative requirements when compared with a traditional corporation.  A corporation generally requires that the shareholders and directors hold annual meetings and that the minutes of these meetings be memorialized in writing and stored in the books of the corporation.  Conversely, California Law does not have a requirement that an LLC comply with these annual meetings and minutes requirements. When considering the type of business entity to form, many business and/or property owners are drawn to the fact that the LLC entity is not obligated to comply with these ongoing annual formalities.

For additional information, please feel free to contact me through my website at www.willsandtrustslaw.com or directly at (949) 261-5777.

The information provided in this article is for general informational purposes and is not intended to be legal advice.   The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance.  Each situation is different and requires particularized legal advice.  It is strongly recommended that you consult an attorney for individual advice regarding your specific situation. IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.