Kerrie: So what do you know about limited liability companies?

Jim: Enough to know that this should be interesting. What exactly is the question?

Kerrie: I have a client who would like to purchase some rental property currently titled in an LLC. You know, for liability reasons and all that. The LLC has the property on the market and his agent told him that it could be beneficial to transfer the membership interest in the LLC rather than conveying title to the property. Any thoughts on that?

Jim: A limited liability company is a separate person under the law and can hold title to and convey real property. An LLC is owned by its members in a manner similar to shareholders in a corporation. Since the LLC is separate from its members, the law generally provides that the members are not personally liable for the debts and actions of the company. For example, if a tenant slips and falls in an apartment building and sues the LLC owner for umpteen billion dollars, plus emotional distress, punitive damages and attorney fees, the members of the LLC are protected against any judgment against their personal assets.

Kerrie: Sounds good, so far. I believe that there are also some tax advantages to owning property in an LLC.

Jim: That’s true, but tax implications are way too complicated to discuss here.

Kerrie: So why would it be beneficial for my client to accept transfer of the membership interests rather than just accepting conveyance of the property by warranty deed?

Jim: There are really two main reasons why membership transfer is beneficial. First of all, there is no transfer of title to the real estate. The title stays in the name of the LLC, but the ownership of the LLC changes. Since there is no conveyance of real property, there is no conveyance tax to be paid to the county auditor. On a large commercial property that could save the seller a significant amount of money. Secondly, since there is no conveyance there is nothing to trigger an increased appraised value of the real estate. So the real estate taxes should not be affected until the next scheduled reappraisal. Again, the result is a significant savings to the buyer.

Kerrie: There must be a catch. There is always a catch. If someone buys an LLC, don’t they get all of the baggage of the LLC?

Jim: That’s absolutely correct. So careful due diligence and investigation of the LLC is absolutely necessary as part of the transaction.

Kerrie: Assuming that the LLC is free of baggage, any other issues.

Jim: Structuring the transaction can be problematic. Although the intent of the transaction is to transfer real estate, it is LLC memberships that are being transferred. LLC memberships can be considered securities and subject to considerable federal and state regulation. A real estate broker’s license does not authorize him or her to sell securities. There have been some real estate brokers who have paid penalties for practicing securities brokerage without a license, even though the intent of the sale was to transfer the real estate.

Kerrie: And as I recall, the sale of securities is highly regulated and if the proper disclosures are not given to the buyer, the buyer can void the transaction and potentially be awarded treble damages.

Jim: Very true, my dear. So your client had best consult with you very carefully in this transaction, as well as his accountant.

Kerrie: I hate to admit it, but I agree with you.

Jim: Yessss!