Way back in June I briefly discussed some of the challenges that come with owning real estate jointly with others. At that time I suggested that a Limited Liability Company (LLC) may be a useful tool to limit conflicts from arising. In this post, I hope to go a little more in depth on why this is the case.
Initially, there are two major benefits of transferring real estate to an LLC. First, the LLC provides the benefit of limited liability, potentially leaving your personal assets protected from liability that can come from ownership of the property. Second, and my focus today, the LLC can provide its owners, or members, with some certainty regarding the rights and responsibilities of ownership through a well drafted Operating Agreement.
Briefly, an Operating Agreement is the governing document of a Limited Liability Company. Generally, the Operating Agreement controls how and by who the company is managed. For example, the Operating Agreement state whether the company is managed by a Manager or the owners (known as members) collectively. Additionally, it will provide the scope of authority a manager may have and whether there are any limits on that authority.
The following are just a few examples of the questions that a solid operating agreement could address. Are members required to contribute funds to the LLC to cover ownership expenses? How is the contribution amount calculated? What are the consequences of a member failing to contribute to maintenance? Who is responsible of upkeep of the property? How is use of the property going to be governed? How many members need to agree to sell or transfer the property?
Any of the above questions could come up when real estate is owned by more than one person. An LLC and Operating Agreement can settle the answers to those questions well before any disputes arise. If a dispute does come up, the members will then be able to consult the Operating Agreement to determine how to resolve it. If you own property with others, consult with a Maine business or real estate attorney to see if an LLC is the right choice for your situation.