Articles Posted in Business Forms and Entities

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Author: Staff

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.

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Author: Staff

Investors in California real estate hope for returns on their investments, but they must also understand the inevitable risks. A real estate investment, whether it involves participating in a real estate syndicate, buying shares in a real estate investment trust or buying land for development, is a business venture. All business ventures involve risk, starting with the loss of the investment principal and continuing to the limits of the imagination. Investors should carefully consider their potential liabilities and plan a business entity accordingly. Proceeding without any formal legal structure creates a sole proprietorship or general partnership, which offers no protection from liability. California law allows real estate investors to form various business entities that can shield them from liability for business obligations, including a limited liability company (LLC).

Liability Protection

Author: Staff

Investing in California real estate is generally considered a business activity, meaning that it is undertaken for the primary purpose of making a profit, as opposed to charity or recreation. Business activities can have important effects on a person’s life and finances, including taxes and other potential liabilities.

When an individual invests in an ongoing venture like a real estate syndicate or a real estate investment trust (REIT), they are buying equity in an existing business. When one or more individuals engage in their own investment activity, such as by buying a house with the intention of flipping it, they have effectively started their own business.

Author: Staff

Sometimes investors in California are interested in having the flexibility of a partnership structure but are worried about personal liability. In a limited partnership, there are one or more general partners and one or more limited partners. There always needs to be at least one general partner, and the general partner or general partners will have unlimited liability for the partnership’s debts and liabilities. Under California Corporations Code § 15611, the limited partners contribute capital but don’t get to manage or have other responsibilities and aren’t held liable for partnership obligations that go over their capital contributions. Often, however, an Limited Liability Corporation (LLC) is considered a more favorable vehicle for real estate than a limited partnership in California. For example, all of the owners of an LLC can manage it.

To form a limited partnership in California, investors file a certificate of limited partnership. Limited partners do not need to disclose their names or legal information. There is no legal requirement that a partnership agreement be in writing, but it is important to have one. The agreement will set forth why the partnership is being created, how business is going to be conducted, the rights and liabilities of each partner, and other contingencies. Negotiating and creating a written agreement about how a limited real estate partnership will be conducted can eliminate litigation down the road.

In most cases, a limited partnership is a good way for passive investors in real estate to become involved. A limited partner gets to invest in real estate and share in profits when the project is successful, but they aren’t held responsible for liability when it exceeds their initial capital contribution. The general partners are liable beyond this amount and are considered jointly and severally liable to third parties when a lawsuit arises from their actions on behalf of or in the course of the partnership.

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