I am a wealthy individual, I live in Delaware, and I am buying seven different vacation condo units in Ocean City, MD. What entity structure should I use to minimize liability?

Many of our real estate investor customers form an LLC to hold and manage their real estate in order to protect their other assets from liabilities or lawsuits that might result from their real estate investment. If the LLC is formed and managed correctly and there is a claim or lawsuit relating to the real estate, then generally only the assets owned by the LLC, and not the investor's other personal assets, will be subject to the claim or lawsuit. The Company Corporation can help protect an investor's other personal assets by properly forming the LLC and helping to ensure that it is properly maintained.

Although both an LLC and a corporation can help protect an investor from liability, we find that most investors choose an LLC to hold their investment real estate. An LLC can offer more freedom in the management of the property. For example, in the LLC operating agreement, the investors can expressly set forth and/or limit the rights, powers and obligations of the manager and the members. An LLC also may not require some of the formalities of a corporation, such as annual meetings. In addition, an LLC may have tax advantages over a corporation, such as an LLC with only one owner may not have to file a separate tax return and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate tax return.

Which state or states?

Although investors often form an LLC or corporation in the state where the properties are located, some investors elect to form the entity in another state, such as Delaware. The laws relating to LLCs and corporations vary by state, and therefore, it is important to understand the law of the state in which the entity is formed. For example, only some states (such as Delaware) permit series LLC, but a Delaware series LLC can be used to hold property located in other states. The decision as to where to form the entity may depend on numerous factors, including tax considerations. In addition, it may be necessary to register the LLC or corporation to do business in the state where the property is located if the entity is formed in a different state. The Company Corporation can help investors form an LLC or corporation in any state, and can also assist with registering the entity to do business in any state.

What if I am buying the properties with cash?

The fact that a real estate investor is purchasing properties with cash should not affect whether or not he or she forms an LLC or corporation to hold the properties. Generally, the cash can be contributed to the entity, which may then purchase the property and take the title directly.

What if I am putting 20% down and financing the rest?

An LLC or corporation owned by one or several investors may apply to a lender for a loan. The real estate purchased by the LLC or corporation typically must be pledged as collateral for the loan. In addition, because the loan is being made to an entity and not to a private individual, the lender will often request a personal guarantee or collateral from one or more of the investors. Banks and mortgage companies typically make lending decisions based on the borrower's credit. A strong debt repayment history, a good debt-to-income ratio and sufficient assets to act as collateral are what banks usually look for when they make lending decisions. This is true regardless of whether the borrower is an individual, an LLC or a corporation.Lenders will provide real estate loans to investors, but generally they associate more risk with an investment property than a mortgage for a personal home purchase. Consequently, investors must often pay higher interest rates on an investment property regardless of whether they buy the property as an individual or through an LLC or corporation. Loans for the purchase of investment properties generally will require a larger down payment, often in the neighborhood of 20 to 25 percent. Exact terms, conditions and loan options will vary from lender to lender.

Should I do it personally or through the entity or entities that are formed?

As explained above, lenders will provide loans to LLCs and corporations in connection with real estate investments. Generally, it is preferable to have the entity that owns the property obtain the loan directly. Among other reasons, if the entity is the borrower, the investors will not likely be personally liable for amount of the loan -- assuming that they did not provide a personal guarantee.