I recently met a corporate and business tax lawyer to learn about the entity structure. He actually recommended using LLP instead of LLC . I understand that LLC is the most popular entites people use to hold real estate. I remembered that his reply to this question is that there were a few cases where LLC actually lost the cases in some states.
The structure he recommended is to use a LLP to hold the property. Setting up a Corp as the general partner and I am the limited partner. If there is any lawsuit result from the property, general partner (the corp) is the only one liable.
What do you guys think about this structure? I know a lot people use LLC, why not LLP?
The LLP is probably not popular because it has unlimited liability for the general partner. This is eliminated when using a Corp for the general partner, however it is cumbersome before it requires two entities. In addition, using a corp will incur a corporate level tax unless a valid S election is made. A corp generally also carries with it more administrative burden.
In the hedge fund/private equity world, it is common to see an LP as the fund with the LLC as a general partner. This eliminates liability of the general partner while still giving pass through tax treatment.
In both of the structures, it is true that you have an additional layer of protection, which would protect you in the event there is a problem with your LLC. However, in my opinion, setting up an LLC (if done properly) is sufficient for most needs. It really depends on what you are doing, what your goals are and the amount of asset protection you are comfortable with.
While I don’t know what cases he is referring to, it is likely that the LLC was busted because, like any other entity, it wasn’t being operated properly. There is nothing inherently weak about the LLC form. ALL entities must be properly managed to avoid being declared an “alter ego” of the owner.
Also, while both the LLC and GP/LP protect the partners from liability, the partnership itself can still be liable.