Operate Your Investment Property Like a Business - Part 2

In this installment we will look at the process of registering a new limited liability company with the Washington Secretary of State Corporations by submitting a “certificate of formation.” But first let’s take a look at why we are choosing a LLC over a sole proprietorship or corporation. Limited liability companies are a creature of statute.


Happily, an LLC is a “best of both worlds” form of business organization because it features the flexibility of operating a business like a sole proprietorship (i.e., an unincorporated business owned by an individual without existence apart from its owner), but has the liability shield of a corporation (i.e., with a few qualified exceptions, a party only has standing to sue the company, not the owners of the company).


A “single member” or a “husband and wife” LLC is considered a disregarded entity for tax purposes. This simply means that the LLC is taxed like a sole proprietorship. However, once a third-party is brought in to the LLC as a “member,” then the “manager(s)” or “member(s)” (we’ll get into the significance of what that means in a later post), must elect to have their LLC taxed as either a partnership or corporation. I leave tax issues to the tax gurus and always recommend that my clients engage a CPA as part of the business formation team.


Here is a checklist of information that you will need to file a Certificate of Formation for a Limited Liability Company:

• Name of Company & Two Alternative Names;
• Contact Information for questions regarding the application;
• The Business Purpose of the LLC (e.g., real estate investments, any lawful purpose);
• The date you want the company to go “live” (e.g., date of filing or specific date);
• The “duration” of the company (e.g., perpetual or specific date);
• The LLC’s Principal Place of Business (e.g., your home or business address, or if you have an office at the MHC property location, then that address);
• Company Management (i.e., member- or manager-managed);
• Name, physical and email address of the “registered agent” (i.e., the person that interacts with the secretary of state and accepts service of process if the company is sued). Some of our clients prefer that we act as registered agent, others prefer to act as their own registered agent; and
• The names of the “members” (e.g., you, or, your spouse and you). There can be any number of additional members of the company. In fact, members of the company don’t even have to be human beings. We’ll go over that in later past too.

We usually also prepare the company’s Online “Initial Report” at the time of the filing of the Certificate of Formation as that is an option offered during the online filing process. A company’s initial report must be delivered to the Secretary of State within one hundred twenty days of the date on which a company’s Certificate of Formation is filed [RCW 25.15.105(3)].


The only thing you need in addition to the information provided with the Certificate of Formation is a brief statement of the nature of the business. But that’s easy; we’re in the real estate business, investing in real estate, so the nature of business may be stated as something as simple as “Real Estate Investments” or “Property Management.” Easy as that!


Once filed, you will need to wait about one week to hear back from the Washington Secretary of State, or your lawyer if he or she filed for you, on the status of your filing. Once you are notified that your application has been accepted then you will be issued a formal embossed Certificate of Formation from the Washington Secretary of State at which time your LLC is officially operating.


Now that you own a brand new limited liability company, we need to get busy with preparing a member agreement and transferring property into the name of the company. We will delve into “members,” “member agreements,” and “conveyances into the company” in the following posts.