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What's the first step to protect these properties?

The first rule is to title all real estate that you own or co-own – other than your personal residence – to one or more limited liability companies (LLCs). This includes rental and commercial properties, land, vacation homes and time shares. Why is the LLC the ideal entity to own your investment real estate? Because it protects the owner(s) personally from liabilities originating from the property (as would a corporation), and, as importantly, it shelters the property and your interest in the LLC against claims by your personal creditors. The LLC, as with the limited partnership, is a charging order protected entity (COPE). COPE entities limit the creditor of an LLC member to a 'charging order'. The creditor can only claim profit distributions made from the LLC (or limited partnership) to that debtor-member. This is the creditor's sole remedy. The member's personal creditor cannot claim the LLC membership interest. However, the creditor can claim the stock ownership in a corporation. This is the major reason why we use the LLC to own non-residential property.

There are several other reasons we prefer an LLC over either a corporation or limited partnership as the entity for investment properties. You avoid double taxation with a limited liability company. Since the limited liability company isn't usually taxed as a corporation, you avoid the corporate income tax. Limited liability company income is usually taxed personally to its members. You also avoid personal liability with a limited liability company. LLC managers and members are personally protected from the LLC's creditors, even when the LLC members manage the company. Conversely, general partners of a limited partnership are personally liable for partnership debts. Limited partners of a limited partnership cannot manage the limited partnership without incurring personal liability, though you can avoid this personal exposure by forming a corporation or LLC to be the general partner.

As we mentioned earlier, the charging order is not usually an effective creditor remedy. It won't give the creditor voting rights. The LLC manager can't be forced to pay profit distributions to the members (or to the member's creditors). The LLC's charging order is usually as futile a creditor remedy as with limited partnerships. If you manage your LLC, you decide upon distributions. Your judgment creditor cannot vote you out as the manager because a member's creditor has no vote. For as long as your creditor has a charging order, you can withhold distributions. Nevertheless, you can compensate yourself (and other members) and pay yourself salaries for services, and use other indirect mechanisms to withdraw money from the LLC. Salaries cannot be claimed through the charging order, nor can loans or other compensation be paid to managers or members.

Clearly, for the family-owned income property, the LLC is the entity of choice. Few asset protection attorneys disagree. Larger real estate projects or entities with publicly-traded securities and outside investors may choose limited partnerships or real estate investment trusts (REITs). But the ownership interests in these entities can be similarly protected from creditor claim. If a debtor-member of a limited partnership or REIT cannot prevent profit distributions (which can be claimed by their creditors); they should have an LLC own their partnership interest or beneficial interest in the REIT so profit distributions flow to the LLC, not to the debtor-partner/beneficiary's creditor.

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The Presser Law Firm, P.A. - Asset Protection Attorney
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