In a world where social media is driven by tweets, likes, posts and shares, privacy is an especially valuable commodity.
To that end, many home buyers and real-estate investors form limited-liability companies with cryptic names when purchasing property. This appeals to the publicity shy, but LLCs also help homeowners avoid scams, identity theft and frivolous lawsuits.
LLCs have long been popular. In Florida, for example, two-thirds (66.6%) of all new business entities formed in 2017 were domestic LLCs, according to the Florida Department of State. But because the Tax Cuts and Jobs Act, in effect since Jan. 1, provides favorable tax treatment to so-called pass-through business entities such as partnerships, S corporations and LLCs, the use of LLCs is expected to explode.
Investors like Scott Wood use LLCs to take title to their real-estate holdings. Mr. Wood, an employee-benefits consultant from Scottsdale, Ariz., sold an insurance business in 2006 for “eight figures” and invested the proceeds in commercial and residential real estate. Each property was purchased in the name of a separate LLC he set up for that purpose.
“My main objective was to be able to safely invest funds and have my assets protected,” he says. “Real estate comes with various unknown risks, and I didn’t want to do it in my own name so people were able to monitor and track what I was investing in. An LLC is simple, easy, inexpensive and protective.”
LLCs are relatively easy to set up, but specific requirements vary by state.
In Delaware, for example—a state popular for business formations of all types—the state Division of Corporations offers a downloadable form that asks the name of the LLC, as well as the name and address of a registered agent in Delaware. The document needs to be signed and filed, and a $90 fee paid. A Delaware LLC must pay annual taxes in the amount of $300.
Although Delaware is among the states that maintain the confidentiality of an LLC’s members, other states require disclosure. In those states, even if a property is purchased under an LLC, it may be possible to discover the names of the true owners of the property.
But while the majority of LLC owners are law-abiding citizens, LLCs can also provide anonymity to embezzlers, drug traffickers, money launderers, tax evaders, those seeking to skirt campaign-finance laws and others who wish to hide or obscure illicit funds.
State Sen. Brad Hoylman, a Democrat from New York City, is drafting legislation that wouldn’t necessarily curb the use of LLCs, but would require that LLCs organized or authorized to do business in New York publicly disclose a list of their beneficial owners.
“In New York, we have very archaic laws around LLCs, which is a great concern,” he says. “In many cases, tenants don’t know who their landlord is. On a larger level, New Yorkers don’t know who is behind many, if not most, of these LLCs—and unlike other corporate entities, even the New York Department of State does not know.”
But some investors say that increased disclosure requirements would have a chilling effect on their use of LLCs. “I would probably do a lot less investing in real estate if I couldn’t have the title held in an LLC,” Mr. Wood says.
Paul M. Fann, a Scottsdale-based accountant who regularly works with real-estate investors to set up LLCs, is concerned that efforts to crack down on LLCs and require disclosure of owners would be bad for business.
“It makes for great public discourse, but it makes no sense for economics and for investing,” he says. “There are fabulous reasons to use an LLC, and states that want our business will not want to alienate investors by requiring openness and more disclosure.”
Originally Published March 7, 2018 in Wall Street Journal