Investing in real estate in California, or anywhere, really, is risky, with potential liabilities extending beyond sunken costs. A business entity, such as a corporation or a limited liability company (LLC), can protect investors from liabilities associated with their investment. They can also protect the investment properties from unrelated issues in an investor’s personal life. A California real estate investor does not need to form a business entity in order to make an investment, but it can be useful. Understanding how, and when, forming a business can help is an important part of planning an investment.
Limited Liability of Investors
One of the primary purposes of business entities like corporations is the protection they offer owners against liability for business debts. It is such a central feature that it is part of the name of business forms like the LLC. An individual engaged in a business activity on their own, including real estate investment, is known as a sole proprietor. A group of individuals doing business together form a general partnership by default. In either case, the individuals are liable for any debts or other obligations arising from their business activities. Partners in a general partnership are jointly and severally liable for one another’s business activities.
California law governs the formation and operation of business entities within the state, and determines their limitations on liability. Shareholders in corporations, members of LLC’s, limited partners in limited partnerships, and owners of other business entities are not individually liable for anything arising from ordinary business activities undertaken through the business entity. This requires a strict separation of personal and business assets and activities. For example, if an investor sets up an LLC to manage their real estate investments, the LLC should have a separate bank account.