Single Member LLCs for Real Estate: Pros and Cons

As with any business enterprise or investment, it’s important not to commingle or interchange personal cash with those of the LLC, writes Pachman.

ROSELAND, NJ—Using a multi member limited liability company (“LLC”) to hold real property affords investors several benefits: the limited liability of a corporation, the pass-through taxation of a partnership, and the ability to write a self-governing operating agreement.  But what about a sole real estate investor?  Although one individual can also hold real estate through a single member LLC (“SMLLC”), there are consequences to consider and understand before placing presently held property in a SMLLC.

Let’s say that Mr. or Ms. Real Estate Owner (“R.E.”) holds a three-unit residential building that produces income. A friend tells R.E. that placing the property in a SMLLC will protect R.E.’s personal fortune from slip and fall lawsuits by the tenants. Moreover, since the SMLLC is not a corporation, there’s no need for corporate formalities such as minutes and resolutions.  In addition, R.E.’s accountant advises that because it is a “disregarded” entity, the SMLLC will not need a separate tax return. As with many things that sound too good to be true, “the devil is in the details.” Before forming a SMLLC and deeding the property to it, R.E. has a number of issues to consider carefully.