It’s important to set up your real estate LLCs appropriately. Not just for obvious business reasons, but because improperly established, noncompliant or mismanaged LLCs are pointless at best and costly at worst. Your entire asset protection can be undermined by one poorly structured or managed entity, because the entity is such a crucial piece of any asset protection plan. No matter what kind of real estate LLC you use—Traditional LLC, Series LLC, a combination of both, a special variation like a married couple LLC, or even multiple LLCs with other structures on top—you must ensure your business choices are clearly conveyed in your paperwork. This includes your Operating Agreement, which can be amended, but functions as your LLC’s bible. So, it’s actually best to get your agreements with any partners, rules, expectations, and plans for dividing profits and losses in lockstep and recorded in ink accurately from the moment you form the company.
It’s equally critical that that you know who is going to manage the LLC and how. After all, you do get to make this decision. All too often, members of multi-member LLCs don’t understand the depth of their options, but you’re not going to be one of them. Here’s the straight dope on using a corporation to manage an LLC, what alternatives you have, and how to decide if corporate LLC management is right for you.
Can a Corporation Manage an LLC?
Usually people ask if a corporation can own an LLC, but this is an example of someone asking the wrong question for the information they seek. Of course a company can buy an LLC, but we’re referring to using a corporation in lieu of a single human manager.
So yes, a corporation can manage an LLC. But it’s far from the most common type of LLC management.
Ways You Can Manage Your Real Estate LLC
To know if going the corporation management route is right for your LLC, you’re going to have to consider the other ways investors manage their companies. Most people go with one of two options:
- Member-managed LLCs. These are by far the majority. Power tends to be divided equitably among the members. A single-member LLC is essentially managed this way by default,
- Manager-managed LLCs. We’ve talked about manager-management concerns and tools here on the RLS blog before and encourage you to learn more. But essentially, an LLC that appoints a manager will legally give that manager certain powers. Doing so is essential so the manager can do their job of running the LLC’s daily operations. Managers may buy or sell assets, hire and fire employees, and take other actions that directly impact members. Members must have confidence in their manager and protect themselves with a well-crafted Operating Agreement.
Investors choose their management style usually. If you have a great person in mind and nobody on your team will rise to the management challenge occasion, a manager’s a great way to go. If each member has confidence the manager is trustworthy, and all ensure that the Operating Agreement of the LLC accurately reflects their desires, then a manager can be a great thing for a real estate LLC.
When a corporation manages your LLC, you can think of the corporation as standing in for a human manager. There’s actually a long history in American law of treating corporations as people, a concept known as corporate personhood in legalese. Depending on the type of corporation you form, you may have several individuals collectively making decisions about your daily operations. Note that your corporation can actually have an unlimited number of managers internally.
How Do You Form a Corporation to Manage Real Estate Investments?
Before we dive into the “how” let’s be clear on what a corporation actually is. First of all, we’ve got two options: the C-Corporation and S-Corporation. Of these two, the S-Corporation is far more popular.
A corporation only helps protect your assets if it’s in lock-step with your business plans. For this reason, many investors choose to form their own: if only to be sure the corporation is friendly to the LLC. That said, corporations require many more legal steps than LLCs, including:
- Naming a board of directors.
- Mandatory meetings complete with required minutes.
- Maintaining your corporate compliance is far more challenging than with alternative entities, almost always requiring some form of professional legal or financial advising help.
- And far more, including tax, legal, and regulatory compliance concerns.
Some businesses need the aspects of corporations so much that the many regulations are simple prices of admission to the Corporation Club. The simple truth is forming a corporation is easy. All you really need to form one is the help of a business or real estate attorney. It helps, but is by no means necessary, to have an idea of what you want to do.
But first, are you sure you even you need to join the Corp Club? For many investors, using a corporation is overkill. Most are just fine with cheaper entities. You have alternatives, after all.
A Happy Medium: The LLC Taxed as an S-Corporation
The most obvious alternative to corporation is using a more traditional management style for your LLC: member-managed or manager-managed. But you’ve got creative entity options, too. We’ve talked about some LLC and Series LLC perks already, but did you know that your LLC can be taxed as an S-Corp?
Real estate investors opt for this choice because:
- LLCs taxed as S-corps receive pass-through benefits and can possibly save some investors thousands in taxes, just as an S-Corp can
- LLCs are easier to set up.
- It’s cheaper. One filing fee, one Operating Agreement, no meetings or minutes or boards to handle or worry about paying.
- Asset protection for active businesses is ideal for this structure. House flippers or vacation renters are examples of “active” real estate businesses. S-Corp structures are ideal for these, but the LLC taxed as an S-Corp is a cheaper alternative if an S-Corporation isn’t practical.
- It’s easier. Most of the time, LLCs are hands-down quicker and simpler to form a permanent corporation. Try using a Joint Venture agreement alongside this entity to test out a new potential S-Corporation set-up.
- Corporations are best suited to larger businesses. By “large,” we mean the kind where a C-level executive team, board of directors, and stock options aren’t just givens but important details.
Now that you’ve gotten the basics down, consider the details of your jurisdiction. In many states, including Texas where Royal Legal Solutions is based, you can convert an LLC into a Corporation. This detail may be helpful to ask your attorney about if you’d like to use an existing corporation. In states that permit such conversions, an investor with an unused LLC may be able to save some major cash by converting into rather than forming a corporation. That said, always check with your personal counsel to be sure this is true for you.
Making the Choice: Is A Corporation-Managed LLC Right for Me?
Determining whether corporate management is the best move for you will depend on several personal factors. You may first consider whether such management is necessary. Small businesses may find that a corporation is more trouble than it’s worth, and that an LLC or two-company Series LLC and shell corporation structure is more effective. Professional help from a qualified real estate lawyer will be a necessity regardless of your entity choices.
While the vast majority of investors decide against managing their real estate LLCs with corporations, your situation may call for such a structure. Learn what you can about your alternatives such as taxing an LLC as an S-Corporation, as well as using other structures or management styles. We believe it’s best to assess your members’ basic needs and study corporation management before making this judgment call. So keep reading. Finishing this article’s a great start. But we hope you’ll continue learning the best strategies for managing your business.