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3 Detestable Horror Stories of LLC Qwnership.

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  • Tip Bones

Have you ever started your own company as a single proprietary? Have you ever started your own Limited Liability Corporation? There is a difference. Not to boast, but In retrospect, I have actually started over a dozen very successful companies in my lifetime. In the beginning, however, they were even good horror stories. In fact, in the middle and towards the end, they were indeed another statistical horror story.

Nevertheless, during this time I have learned an incredible amount of "Do's and Do Not's." And it took me many 'trial and error' tries, before I finally turned over a good profit, and eventually called it another major business success. Let us observe and learn from other people's failures via this article:

Chris Mentillo on Business: (LLC)

In the lovely state of California – the limited liability company or (LLC) is the most 'traditional' way most commercial real estate is owned.

Individuals within an LLC are known as members. Members are governed by an operating agreement that outlines whom within the LLC are authorized to sell, buy, and borrow. Also, percentages of ownership are specified in the case of multiple members.

Why an LLC?

Because they come with a multitude of tax advantages and liability protection, which are beyond the scope of this column. However, commercial real estate practitioners encounter some hairy issues, involving LLC ownership.

Waking a grizzly:

Annual fees must be paid to the Franchise Tax Board, and tax returns must be filed each year with the state of California. If not, the LLC may be declared inactive. 

To re-activate, an LLC is akin to awakening a hibernating grizzly. We once experienced an LLC that owned a parcel of commercial real estate and was allowed to lapse — for 33 years. Now, the owner wanted to sell but couldn’t. You see the individual with whom we were dealing was not the owner because the title was vested as of the LLC. Therefore, with an inactive LLC, the individual member could not sign a listing engagement, execute a purchase and sale agreement, or transact any business until the past returns were completed, and overdue fees paid.

Fortunately, no income had been reported through the LLC, thus no taxes were owed. Consequently, it was a matter of preparing tax returns, dating back to 1986, and forking over 33 years of filing fees, along with interest and penalties in the tens of thousands of dollars. 

Who’s in the mirror?

Oftentimes, we experience an LLC-owned building occupied by a business. Even though the entities of ownership may vary, the individuals of each entity are synonymous. 

In a recent case, two of the three members of the building ownership LLC had died over some time, and the business corporation was sold to the employees. A difference of objectives was formed, and the occupying company needed less space or cheaper rent. The LLC — now comprised of four heirs, and an original member — wanted a maximum return from the investment.

So now what? 

The LLC sold the building, and the business relocated to a smaller facility. But we are divorced? So you have split up. Sadly, your real estate ownership may not be.

In a particularly nasty situation, we were thrust between LLC members — an ex-husband and wife. The only remaining joint asset was a piece of commercial real estate, once occupied by a business they operated. While still married, the business was sold, while the real estate retained, providing good cash flow for the couple. When the two divorced, they wanted to sell the building.

The problem was the divorcees also wanted to defer the taxes from the sale. The solution was a risky tactic, known as a “drop and swap.” The title was changed to tenants-in-common from the LLC. This change in ownership allowed the individual members — divorced husband and wife — to go their ways. 

Please seek legal counsel and tax advice before attempting this.