The Potential Benefits of Utilizing an LLC to Purchase Commercial Real Estate

Commentary: Taking into consideration general principles of corporations law, utilizing an LLC to purchase a commercial property may provide numerous business and tax benefits for the buyer. This may be especially true where a buyer is interested in purchasing multiple properties.

In particular, a buyer may want to set up a “parent” LLC which would act as the owner of various “subsidiary” LLCs. Each separate subsidiary would then be utilized to purchase a single commercial property. Structuring the ownership of the properties in this manner may create substantial tax savings for the buyer.

For instance, if each transaction were structured so that the parent loans the subsidiary the monies to fund the purchase, the respective subsidiary would be responsible for the repayment of the loan, and thus the subsidiary would be deemed to have little equity in the property and thus little assets. As a result, a subsequent transfer of the property by the LLC (to the owner’s children, for instance) would likely have little, if any, tax consequences.

Moreover, it is well-established that an LLC can be deemed to be a disregarded entity for tax purposes. As a general rule, the income of an LLC will “pass through” to the owner of the company, so that the LLC itself is not required to report such income on its tax returns. Thus, the owner could streamline the taxes and other expenses associated with each of its various properties, while at the same time avoiding double taxation on the income generated from each property. Double taxation is a common pitfall of utilizing C-Corporations. For example, if the buyer were to set up a series of subsidiary corporations, as opposed to LLCs, each corporation would have to pay separate corporate income tax for each entity. In addition, the buyer would then have to pay personal income tax on any monies that are income to him (whether through distribution of profits or otherwise). If, on the other hand, if the buyer uses the LLC form to set up his subsidiary companies, the income of each LLC “passes through” to the buyer so that he is only taxed on it once, by reporting it on his personal income tax return.

In addition, as long as each LLC is created and operated in the proper form, the liabilities associated with each respective property will generally not attach to the other companies’ properties. In other words, in most instances each LLC will be only be liable for its own debts and obligations. For example, assume that company A owns a piece of property worth $300,000.00 (Building A) and Company B owns property worth $1,000,000.00 (Building B) and both Company A and B are owned by Company C (the parent company). If Company A is sued and a judgment is reached against it for $500,000.00, the judgment-creditor cannot generally look to collect its judgment against Company B’s property. The alternative would be if Company A owned both properties. In that instance suppose an accident happened in Building A for which the company is deemed liable. In that situation, the judgment-creditor would likely be able to collect against both buildings, since both would be the assets of the judgment-debtor.

When determining if the real estate holding company should be established as an LLC or a corporation, it should be noted that the form of ownership set up by the buyer is unlikely to be an issue to the seller. That being said, if a seller were taking a promissory note from the buyer or the buyer was to otherwise have ongoing liability to the seller, such a structure (whether as a corporation or an LLC) may be a concern to the seller. Insofar as the above-mentioned structure devoids the company of all assets but the one company, a seller may be limited in its rights. This is because, as mentioned above, the assets of each separate subsidiary LLC may be relatively small.

In light of the foregoing, before purchasing an interest in commercial real estate, it may be wise for a potential buyer to formulate an appropriate ownership structure and consider forming a limited liability company through which to effectuate each such transaction. Accordingly, an attorney should be consulted at the outset so as to structure the purchase(s) in a way that is most beneficial to the buyer.

Comments/Questions: ljm@gdnlaw.com

© 2008 Nissenbaum Law Group, LLC