With the Georgia real estate market beginning to show signs of life, now may be the time for many families to buy a second, rental or vacation home or even upgrade to their dream home while keeping their current home as a rental. In Atlanta, the median home price rose in the second quarter of 2012 for the first time since 2008. Whether the trend continues to grow remains to be seen. But regardless, now is as good a time as there has ever been to purchase real estate. When doing so and one of your properties is going to be used as any type of rental, you may want to consider whether to form a Georgia L.L.C. to own the property and provide your family some protection from lawsuits that may arise from tenants or visitors to the property. Here are a few considerations that might help.
Creating an LLC in Georgia is “Super Easy”
Georgia makes creating a limited liability corporation quick and easy. The Georgia Secretary of State has simplified the filing process by allowing you to file an L.L.C. through the Secretary of State’s website. The entire process takes about ten minutes and the filing fee is only $100.
Once you finish with the Secretary of State, you can head straight over to the IRS’s website and grab your EIN (employer identification number). An EIN is essentially the social security number of your L.L.C. You will use it when you set up the bank account for your L.L.C. There is no charge for an E.I.N.
Don’t Forget to Deed the Property to the LLC
This a common mistake that we see from “do it yourself” online legal: people form a corporation or L.L.C. and then don’t realize that they have to actually transfer ownership of their real estate to their company. Property is transferred pursuant to a legal document called a Deed. Always consult an attorney when filing a Deed. A Deed is a serious legal document with significant legal implications.
There are numerous types of Deeds and you need to make sure that you pick the type that is appropriate for what you are trying to accomplish. Plus, if your rental property is subject to a mortgage, you may want to be careful about transferring the property without the bank’s permission. Most mortgages have a “right to accelerate” clause which gives the note holder permission to call your note if you transfer ownership without their permission. Don’t want that to happen. Always consult an attorney.
Liability Protection for Georgia LLCs
This is the million dollar question that we get when we recommend Georgia L.L.C.s. The number one reason to place rental property into an L.L.C. is for liability protection. But how much liability protection does Georgia law actually provide?
Well, the answer is not great. States like Wyoming and Nevada have some of the best laws for L.L.C.s in the country. Georgia, unfortunately, is on the opposite end of the spectrum. Georgia is a very creditor friendly state, including judgment creditors. Georgia does respect the distinction between private and corporate liability; but, they will quickly disregard an L.L.C. or “pierce the corporate veil” if corporate formalities are not observed (i.e. if the L.L.C. is treated no different from its owner). Therefore, when people ask us how much liability protection a Georgia L.L.C. provides, we often respond “as much as you are willing to make it”. It is extremely important for your L.L.C. to look, act, and feel like a company, and not like a sole proprietorship. Here are a few things that you will be expected to do if you want a court to recognize your L.L.C. as separate from you:
1. Act Like a Corporation
The more your L.L.C. looks like a corporation, the better. Therefore, hold an annual family meeting, elect officers and make annual minutes from the meeting. Keep track of your meetings and annual minutes and maintain those records in a corporate minute book. Also, be sure to keep your L.L.C. compliant with annual registrations on the Georgia Secretary of State’s website. The annual filing fee is just $50. Late fees usually kick in on April 1st.
2. Do NOT Co-Mingle Company Funds with Personal Funds
This is the probably the biggest thing that courts frown upon. You will need a separate bank account for your L.L.C. Rent needs to be paid to the account and you should pay expenses for the rental property from the rental property bank account. It is perfectly fine to make distributions to yourself from the L.L.C. bank account but the “in and out” from the account needs to be properly administered.
3. Avoid Doing Your Own Maintenance
Inevitably, something will go wrong and need repair or maintenance. Fixing problems yourself may open you up to personal liability. Having the L.L.C. hire repairmen and maintenance personnel adds a second layer of protection in Georgia, as employees, or “agents”, are responsible for their own negligence whereas the owner / employer may not be liable. Just make sure to “do your homework” and research these employees prior to hiring them.
Tax and Estate Planning Benefits
L.L.C.s for rental properties are typically organized as “pass through” entities, so income from the L.L.C. typically flows through directly to the owners. Additionally, corporate expenses, depreciation and other losses may be deductible. Talk with a CPA or attorney to find out more about the tax benefits of rental property L.L.C.s.
Having a family holding company or investment company can be convenient for estate planning as well. They are easy to add property to; and, if you want to take advantage of annual or lifetime gifting to your descendants, gifting L.L.C. membership interest is often one of the easiest ways to gift.
Best of Luck!
– Norris Legal, L.L.C.
Thank you for reading this article. The information contained in this article is for discussion purposes only. The information contained in this article is not legal advice upon which you should act and simply reading this article does not make you a client of Norris Legal, L.L.C. or any other law firm. Thank you again.