What you need to Know about LLC’s for Real Estate Investments in New York
You recently took the plunge and purchased a new property, perhaps a two family building in Brooklyn, or an investment property in the Hamptons. What type of business structure would be best to protect your personal assets?
Choosing the right business structure can be a frightening task for most businesses. However, the limited liability company (LLC) has become the go to vehicle for owners of income-producing real estate seeking to simply and cheaply protect their personal assets from claims of outsiders. Why?
Because the LLC, like a corporation, provides asset protection for its members from the liabilities associated with rental real estate. However, unlike a corporation, the LLC allows depreciation and real estate losses to flow on to its members’ individual tax returns. Unlike a corporation that can produce taxable income if you refinance the property and take the money out for additional investment, an LLC allows money to flow freely. Taxes for LLCs are based on actual income, not borrowed funds.
Because the LLC is a separate legal entity, like a C corporation, you may be able to protect your personal assets if there becomes an issue related to your ownership of the property. However, you need to be aware that there are limits.
- Piercing the Corporate Veil. Piercing the corporate veil is an equitable doctrine invoked by courts to allow a creditor recourse against the shareholders of a corporation, including a LLC. In short, the limited liability protection which is the hallmark of a corporation is disregarded and the debt of the pierced entity becomes enforceable against those who have exercised dominion over the corporation to the point that it has no real separate existence. That means that you can still be held personally responsible for the the debts of your LLC if they are successful in piercing the corporate veil.
Owning real estate for investment, especially residential and commercial real estate is inherently risky. Accidents happen. When people are injured they sue the property owner for damages.
Insurance is the first line of defense to protect against claims arising from the property, but judgments can exceed the amount of insurance coverage and sometimes insurance coverage is denied. For example, if you have a $1,000,000 general liability policy and an injured tenant obtains a judgment against you for $2,000,000, then you would be personally responsible for $1,000,00. However, if you have an LLC they would not be able to go after you personal assets.
If you have any question regarding setting up a LLC for your Real Estate Investments in New York, call us at 212-233-0666.