Should I have an LLC for my Florida Investment Real Estate?
1. Liability Protection
Investing in real estate will always involve some risk taking. People invest in real estate for a number of reasons. Two of the most popular reasons are house flipping and renting. If you are buying and improving properties for resale, or in other words flipping real estate, you will require the use of parties to help with the improvements, such as contractors, plumbers, and electricians. Contracts will be signed and the potential for accidents and disputes that arise out of the business activity will most likely develop. If you are a landlord, risk develops with the presence of a tenant. When you take into account the fact that your business is also holding property that is of potentially significant value, there is a great deal to lose if a dispute or accident occurs or if a lawsuit is filed.
If a tenant or other individual present on the property sues you as the owner, the individual suing will only be able to reach into the assets of the LLC, and not your own personal assets. As long as you are able to keep your assets separated from that of the LLC (i.e. separate bank accounts and only using the business account to pay business expenses, such as your salary and property repairs) the plaintiff will not be able to pierce the corporate veil. Piercing the corporate veil is when the court ignores the liability protection of the LLC and goes straight for your own personal assets. The court allows this when it finds that you commingled the funds by treating the LLC assets as your own personal assets and did not keep them separate.
With the risk profile that comes with real estate investments, it is vital that the real estate and the business be operated through an asset protection entity.
2. Estate Planning Benefits
To understand the estate planning benefits an LLC offers, you must first learn that, under Florida law, the LLC ownership interest unit is considered “personal property.”
A will or trust disposes of your real estate and personal property upon your death in the manner you so choose. If you have a revocable living trust, common issues with your beneficiaries or heirs are generally alleviated. For example, if you own Florida real estate in your own name and have four children, all four children will co-own the real estate when you die. In practicality, not all children foot the expenses of owning the real estate. Usually, one or two children will pay the property tax, insurance, and maintenance while the others sit back because they are either lazy or cannot afford to keep up the property while at the same time wanting their equal share of real estate when it is sold. Unfortunately, the children will most likely begin to fight with each other. In an LLC owned by the trust, the trustee can pay the upkeep expenses with other assets until the property is sold and eliminate the problem with multiple owners of real estate.
In Florida, LLC ownership will also reduce the costs of probate. If you devise real estate held by you individually through a will, then the personal representative will need to transfer the real estate to your beneficiaries by a deed. The straight deed transfer involves additional recording fees and attorney drafting expenses. An LLC eliminates this by keeping the property titled in the name of the business.
3. What do I get from Murphy & Berglund, PLLC if the firm creates my Florida LLC?
Murphy & Berglund, PLLC will form your Florida LLC to the legal requirements. The firm will draft an operating agreement that will govern every aspect of how your LLC will be run. The firm will ensure the name you wish to have for your LLC is readily available by checking with the Florida LLC database and reserve that name for you if it is available. Many people choose to name his or her LLC after the property address, such as “1111 Douglas Ave., LLC.” If you do not already have one, the firm will work with you to find a suitable tax professional to ensure you select the best tax structures for your LLC. Our firm will guide you through every step of the process and deal with all necessary communication with the state in order to form your LLC. Murphy & Berglund, PLLC will also provide you with a binder including all of your documentation and any additional instructions regarding the maintenance of your LLC.
4. The LLC is formed. Is there more I have to do?
Unfortunately, yes. The payoff for having additional asset protection and estate planning is the necessity of upkeep. You will need to have corporate records or LLC records which can be drafted by our firm. Forming an LLC involves more action than merely filling out an online form at sunbiz.org. You must also have a yearly meeting with minutes, which is relatively simple and inexpensive. There is also a yearly fee with the Florida Department of State, Division of Corporations that can be paid through sunbiz.org.
Keeping proper records for your LLC is incredibly important especially if you ever have a lawsuit filed against you or your LLC or be audited by the IRS. If your LLC is found to be liable by a Florida court for money damages, then the owner of the LLC will be deposed under oath about the records for the LLC. If the plaintiff’s attorney learns that you have not kept proper minutes, do not have an operating agreement, or there is not a document showing your ownership interest in the LLC, then a Florida court could “pierce the corporate veil” of the LLC.
With the keeping of proper records, it is as though you and your investment property business are two different people and thus your personal assets are protected. Without the proper records you and your investment property are considered one person and therefore your personal assets may be at risk. Let Murphy & Berglund, PLLC help keep your personal assets safe by contacting them today.