Legal Question in Business Law in California

Re: LLC - Dissolve it or not?

One thing you didn't mention is whether the properties are owned by the LLC, or whether the LLC has engaged in borrowing.

Often, real estate investors buy property, then later on get the bright idea that they can save insurance costs and/or get liability protection by "putting the property in" an LLC. This is usually easier said than done, unless the property was bought for cash and has no financing in place. Most loans and most lenders don't allow the collateral to be transferred to an LLC after the individual(s) borrow and purchase in their own names.

On the bright side, this makes it easier for the individual owner to give up the LLC as an expensive mistake. Keep in mind that every time property is bought or sold - as when it moves from individual to LLC ownership, or in reverse - there are possibly taxable transactions, the possibility of reappraisal, costs for title insurance, recording costs, and the likelihood of a breach of a loan covenant. If the properties were never transferred to the LLC's ownership in the first place, dumping the LLC will be a lot easier.

I wouldn't necessarily decide this whole matter solely on the basis of the minimum franchise tax vs. cost of liability insurance, however; the protection the owners get from insurance and from an LLC are somewhat overlapping, but not completely. Also, there may be organizational, management or tax reasons for using an LLC, especially if there are multiple owners.

Whether to use your LLC or not is too personal and situation-specific a question to be answered by a stranger, but I hope the above mini-discussion will help point you in the right direction.

Re: LLC - Dissolve it or not?

What if you incur a liability of $500k? Guess who would generally pick up the tab for the amount above insurance? There is no right or wrong answer here (and certainly no one can provide you with any complete answer in an email). It all depends on your risk tolerance, whether you have any assets, whether you have adequate insurance,...etc. A common scenario where a property owner incurs liability is where the owner negligently maintains a dangerous condition on the property and someone gets injured. Poor lighting, loose handrail, holes, uneven walkways, etc.

Also, who is we? Your spouse? Or do you have a partner of some sort? If you have a partner, that's a whole other ball of wax. You are strongly advised to reduce your understanding with your partner to writing ASAP, whether the agreement is contained within an LLC operating agreement, or otherwise. This is fertile ground for litigation, and we see it routinely.

Also, if you own the property with a partner, in a partnership (which the law may deem to exist), that creates another set of scenarios for personal liability.

Feel free to call or email for a free consultation. We are located in Newport Beach and practice real estate law.