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.
A great number of
Washington State individuals and families that acquired investment
properties over the past several decades have seen an inflation-adjusted
increase in value far beyond their initial expectations. During the
same time period the myriad of new case law and regulations impacting
the zoning, land use, development, redevelopment, financing and leasing,
and brokerage of those properties have put full- and part-time real
estate investors in a potentially precarious position. Given the
density of development in Washington State and in particularly King,
Pierce and Snohomish Counties, and the litigious nature of our society
in general, the potential risks facing investment property owners can
dampen those inflation-adjusted returns on investment. However, there
are a number of things an investor can do to increase his or her chances
of success and to avoid unnecessary legal risk.
The
fact of the matter is your investment property is a form of business.
It shares a number of characteristics of a traditional brick and mortar
business and should be run like a business. In this and the next few
postings to my blog I will address what it takes to operate your
investment property like a business.
While
we will explore the concept of operating an investment property like a
business in context of owning and operating a manufactured home
community (MHC), the same principals apply to any investment property,
including shopping centers, manufacturing facilities and warehouse
properties, apartments, or even tri-plexs or single family homes for
that matter.
Examples
of similarity between a MHC and traditional “brick and mortar” business
include the means of holding ownership, marketing and promotion,
product differentiation, qualifying customers/tenants, sales of
goods/rentals of pads or developed pads with homes, accounts
receivables, payments of operating expenses and sales related expenses,
tax accounting, management, the list goes on and on.
In
advising clients on good business practices to apply to their real
estate investment strategy, the first thing we look at is how their
property is held. The most common form of ownership of family
investment properties are in the name of the individual or in the name
of the estate. For example, taking title as “Betty Brown as her
separate property,” “the Estate of Bob Brown,” “Bobby and Betty Brown,
as joint tenants with the right of survivorship,” or the like. The
problem is that with property held in an individual’s or an estate’s
name is risk. That is why savvy commercial property owners have their
properties vest into either a limited liability company or S-corp.
There are three forms of business ownership - sole proprietorship, corporation or, limited liability company.
Most business are held and operated as either a corporation or a
limited liability company. The most prevalent form of commercial real
estate ownership is through a limited liability company. The reason for
vesting title to investment real property in
a limited liability company, or LLC, is simple. An LLC offers
flexibility of management and distributions, and offers its owners,
called “members,” just what the name says – a limitation of liability.
Before exploring the kinds of liability that the members are limited
from incurring, or the flexibility of management and distribution of
income, expenses and tax benefits, let’s look at what it takes to
register a new limited liability company.
What
is meant by “register a new limited liability company?” Washington
State LLCs must be registered with the Washington Secretary of State
Corporations to be effective. A limited liability company may be
registered online at https://corps2.sos.wa.gov/LLC/Pages/StartPage.aspx, or the forms may be downloaded and delivered to the Secretary of State Corporations via regular mail.
In our next installment we will look closer at the registration process
and the information you will need to furnish your lawyer, or if you’re a
DIYer, the information you will need to furnish the Department of Corporations to initiate the registration process, better known as filing a “Certificate of Formation.”
