Common Legal Issues When Buying Property Through an LLC

You found the property. Your LLC is formed. You’re ready to make an offer. Buying property through an LLC involves more than putting the company’s name on the deed. Depending on how the LLC is structured, there may be specific requirements for approving the purchase, signing documents, contributing money, or taking on debt. Miss those details, and a transaction that looks simple on paper can turn into a dispute between members or a much bigger legal problem.

Key Takeaways

• Forming an LLC doesn’t automatically mean any member can sign a real estate purchase agreement on its behalf.
• Your operating agreement should address how major property decisions are made before you start shopping for real estate.
• The LLC should be properly identified on the deed and transaction documents to avoid future ownership disputes.
• Maintain a clear separation between personal and LLC assets to preserve the protections the entity is intended to provide.

Operating Agreement May Not Address the Property Purchase

For many, the legal seeds of legal trouble are planted long before a piece of real estate is considered for purchase. The operating agreement is written when the LLC is formed and usually at that time, there is no mention of purchasing property in the operating agreement.

California generally allows the operating agreement to govern how the LLC operates. So this is the ideal place to outline the process for purchasing property. It could include who can approve purchases, who can sign contracts, how members contribute capital, and how the profits and expenses are divided. It’s also important to include provisions for when the members do not agree. Unclear provisions can become especially problematic when multiple members disagree about a property's management, financing, or eventual sale.

LLC May Not Have Authority to Make the Purchase

An LLC is a legal entity, so someone needs to have the authority to act on its behalf. Before the LLC enters into a purchase agreement, the people behind it need to designate someone with authority. In California, an LLC can be member-managed or manager-managed. In a member-managed LLC, members generally have management authority. A manager-managed LLC places management authority with the designated managers.

The LLC’s operating agreement could have additional requirements that must be met before the designated manager can act. These often apply to major transactions, such as a real estate purchase. A member or manager who signs a purchase agreement without the required authority or approval can create a dispute over LLC ownership.

LLC Structure Does Not Automatically Protect Members

One reason investors buy property through an LLC is to separate business or property-related liabilities from their personal assets. However, that liability shield has limits. California law recognizes potential personal liability under alter-ego principles. Should an issue go to court, the LLC’s legal protections may be disregarded, and the members may be held personally liable. This can happen when there is no real separation between the owner and the LLC and treating the entity as separate would result in an injustice or fraud.

The distinction between LLC property and personal property needs to be maintained in practice, not just on paper. This makes proper documentation, separate finances, appropriate insurance, and adherence to the LLC's governing documents important considerations.

Financing Can Create Personal Liability

Many lenders treat LLCs differently from individuals when reviewing loan applications for property purchases. There may be stricter requirements for approval. LLC members may be asked to personally guarantee the loan. However, a personal guarantee can create individual liability, defeating the purpose of having the LLC own the real estate. When personally guaranteeing the loan, the member may not automatically have the same authority over LLC-owned property.

California Property Tax and LLC Obligations Can Complicate the Transaction

Buying property can trigger a California property tax reassessment. This can happen when there is a change in ownership, although statutory exclusions may apply. Transfers involving an LLC can have their own change-of-ownership rules. California LLCs may also have ongoing state tax and filing obligations, including the annual LLC tax. Failing to stay up to date on tax payments can create issues for the LLC that can create multiple layers of legal issues.

Title and Ownership Problems Can Create Future Disputes

Title issues can become more complicated when members mistakenly treat the LLC's property as their own. The deed and other transaction documents should accurately identify the LLC as the buyer and intended owner. LLC members typically own an interest in the LLC, not the LLC-owned real estate. Proper documentation matters if the LLC later sells, refinances, transfers, or encumbers the property.

Work With a California Business Law Attorney

An LLC can be a smart way to own real estate, but simply putting a property in an LLC’s name doesn’t mean you’re protected from every problem that could come up. Before you buy, it’s important to address potential legal issues with a business law attorney. White and Bright, LLP assists clients with the legal side of California real estate transactions and the issues that can arise when an LLC is involved.

If you’re getting ready to purchase real estate through an LLC, contact White and Bright, LLP or call (760) 747-3200 to discuss your transaction before you make the purchase final.