Page 8 September 2016 ( "(#( !( ( ( ( &( '( ! $( '( ( (%( By Jon Hasebe In recent years, real estate investors prefer to hold title to their rental properties in limited liability companies to other types of corporate entity. Limited liability companies provide a number of benefits to real estate investors, including, limitation of personal liability, pass-through taxation, and ease of use. Nevertheless, property owners who want to utilize the limited liability company to hold title to their rental properties should be aware that there are drawbacks with this approach. One of the biggest advantages in using a limited liability company to hold title to property is, unsurprisingly, limiting the liability of the members of the LLC. Provided that members adhere to the formalities set forth by the state of Arizona, they are not personally liable to the debts of the LLC. In other words, when a property owner holds title individually to a property, they put their personal assets at risk in the event a claim is made in connection with the property. If a tenant tripped and fell on a wobbly step, the tenant could make a claim against the property owner personally, which may result in the property owner’s assets being placed at risk. If the property was instead owned by an LLC, the personal assets of the members of the LLC would be insulated by the LLC and the tenant could only make a claim against the assets owned by the LLC. Another benefit of using a limited liability company to hold rental properties is the avoidance of double taxation. Unlike a traditional c-corporation, an LLC is classified as a “disregarded entity” for tax purposes. In other words, if a rental property is owned by a single-member LLC, any income or capital gains generated by that LLC that are distributed to the member would be treated the same as if the member held title to the property individually. In contrast, if a c-corporation were to hold title to a rental property, any income or capital gains would be taxed at the corporate level and any dividends to the shareholders would also be taxed, hence the dreaded “double taxation.” In the event that an LLC that holds title to a rental property has multiple members, the IRS will treat that LLC similar to a partnership. Profits and losses are passed through to each of its members who will then be responsible for reporting their share of the profits and losses on their respective individual income tax returns. Another major advantage of using an LLC to hold rental property is the ease of use. Arizona provides more flexibility to limited liability companies in how they are set up and may operate. Unlike the strict formalities set forth in the statutes for corporations, the duties, powers, rights, and conduct of the affairs of an LLC and its members may be adopted in an operating agreement. The operating agreement is essentially a contract among the company and its members and allows the company and its members f lexibility in regards to how it addresses issues such as transferability of shares, distribution of profits, voting rights, and management of the company. Despite the advantages associated with holding rental properties through a limited liability company, there may be several drawbacks, which might prevent landlords from holding their properties in LLCs. First, is cost. Organizing an LLC and keeping it in good standing can be costly. While boilerplate operating agreements can be found online, this one-size-fits-all approach may cause more problems then it solves, especially when dealing with multiple members. A second drawback is permissibility. If the property has been financed, whether or not the property can be transferred to an LLC will almost always be up to the lender. If the lender consents to the transfer, the property owner should be prepared to sign a personal guaranty, which will keep them on the hook for any obligations arising under the loan. Another drawback is the requirement of disciplined management. As mentioned above, provided that members adhere to the formalities set forth by the state of Arizona , they are not personally liable to the debts of the LLC. Members of the LLC have to be careful not to commingle the assets of the LLC with their personal assets. The LLC should apply for its own employer identification number and bank accounts and the members should make sure to keep records of any actions taken by the LLC. Failing to keep distance between the actions of a company and the actions of its members could open the members up to a veil piercing action that would allow them to be personally sued in addition to the company, which would defeat one of the main advantages of holding the property in an LLC. — Jon Hasebe is a transactional lawyer at Gallagher & Kennedy. For more information about Mr. Hasebe, visit genet.com. Pros and cons of holding rental properties through LLC LEGAL EASE Find an rack location near you. Visit arcadianews.com click on “Pick up a copy” AWA R D W I N N I N G N E I G H B O R H O O D N E W S S I N C E 1 9 9 3
Page 9 September 2016 By Michelle Donati-Grayman When a disaster damages your home, getting it repaired is a top priority. As tempting as a quick fix might be, the first thing you should do is contact your insurance company to report the loss, according to Brad Oltmans, vice president of insurance for AAA Arizona. Insurance experts also recommend preventing further loss to your property to the extent possible. However, they caution against throwing away damaged property until your insurance company advises you it is all right to do so. “Take pictures documenting damages and keep copies of your insurance documents and a record of communication with your insurance company, including names of the people you speak with, dates, times and important information,” Oltmans said. Above all, choose your contractor carefully. Property repair fraud usually involves unethical or incompetent building contractors. Make sure the contractor is licensed, and ask to see the contractor’s license along with other identification. “If someone claims to be representing a contractor, but cannot show you a contractor’s license or home improvement salesperson registration card, call the contractor and find out if the person is authorized to act on their behalf,” Oltmans said. Consider it a red flag if your contractor: • Does not have a local office or local telephone number • Is not willing to provide references • Uses a hotel or restaurant as their contact location • Handles all business in person, avoiding the use of mail • Wants a full cash payment up front • Does not have adequate equipment to perform the job • Approaches you at a loss site without being solicited • Gives an estimate that is overly vague or general • Does not have a contractor’s license bond • Is unwilling to provide a certificate of insurance from their general liability or workers’ compensation insurance carrier • Gives you a bid far below the bids you received from other contractors. The most common fraud that takes place after a disaster generally involves price gouging, incompetent work, use of poor- quality materials, unauthorized property removal and fraudulent charitable solicitations. Because property loss from a disaster can be so traumatic, victims of disaster can become easy targets for fraud. If you suspect fraudulent activity, contact the Arizona Registrar of Contractors, the governing body for Arizona contractors. Before you hire a contractor • Review the contractor’s license record. • Make certain the contractor’s license class allows for the work listed in the contract. • Request a list of references and check them. • Verify the person you are negotiating your project with is an authorized representative of the licensed contractor by calling the contractor’s number listed on the Registrar of Contractors license record. • Ask for written estimates from at least three contractors. • Make sure a detailed list or description of the project – including the price, the responsibility to obtain building permits, and any other relevant terms – is spelled out in the estimate. SOURCE: ARIZONA REGISTRAR OF CONTRACTORS Property repair: Choose your contractor carefully Repairing your home after an insurance claim? Request references from your contractor.