Should You Set Up an LLC as Commercial Property Management?

If you are going to be involved in commercial property management, you should set up an LLC—or possibly a corporation—to perform it through.

Commercial Property Management Risks            

Commercial property management can be lucrative, but it can also be risky. There is a considerable potential for liability, for example. First, you have contractual liability: obligations that you (the commercial property manager) have agreed to.  These include obligations on loans or credit, and a partial list of obligations includes:

• Mortgages (both first and second mortgages)
• Utilities (e.g. electricity, gas/oil, water, telephone, etc.)
• Payroll and benefits (if there are employees)
• Materials and services for repairs, renovations, and construction
• Obligations under the lease(s) to your tenant(s)—which can include obligations for their business losses, if caused by something you did (or should have done, but failed to do)

In addition, any business has the potential to incur tort liability, such as if someone is injured on your property.

The Need to Limit Your Liability

If you are a sole proprietorship or even a partnership, any business risks are all yours (and your partners). Quite simply, these types of business structures are not separate from the owners. Therefore, any obligations of the business are the owners’ obligations, too.

LLCs and Corporations Limit the Owners’ Liability

An LLC is a Limited Liability Company. While LLC law grew out of partnership law, unlike a traditional partnership, an LLC is as separate legal entity, like a corporation, for many purposes. In particular, the members—who are the owners of an LLC—are not responsible for the vast majority of debts or obligations, including those coming out of lawsuits or being sued, incurred by the LLC. This is protection is not absolute—

• Often, lenders will require the owners of a small business to personally guarantee certain obligations; to the extent the owners agree to do so, they are bound by their guarantees.
• Certain tax liabilities are passed on to responsible owners.
• In very rare and extreme cases, if someone sues on an obligation, the court may find that the LLC was “pretextual”—i.e. not a “real” LLC, but just a sham, set up to defraud creditors. If that happens, the personal assets of the owners could be reached by creditors,  but this happens probably less than 1% of the time

—but even without it being absolute, it will protect the owners from the vast majority of business-related debts and obligations.

A corporation will provide similar protection. The choice between setting up an LLC or a corporation an often be a close one: each structure has certain small advantages over the other, though in general, for small businesses that do not anticipate “going public,” an LLC is a better, easier, more flexible choice.

How an Attorney Can Help

A lawyer can help you decide which kind of business structure best suits your needs (including tax needs—there are different consequences depending on how you set it up). The lawyer can then set up the structure for you, and can also draft operating and other agreements that help you manage it and provide guidance.