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There are two sides to every coin. There are also two opinions when you have a partnership. The same is true when you form an LLC for your investment company. The taxation benefits that are usually granted to people that form an LLC for real estate make it quite the attractive business formation. Many beginning investors enjoy the protection that an LLC provides and the pass-through taxation instead of filing corporate tax returns. While there are many benefits to an LLC, a section that is often overlooked is creating an operating agreement. Knowing what is an LLC operating agreement for real estate investing is one thing most investors fail to research. This is where mistakes start and problems show up down the road.
LLC Operating Agreement Defined
Any person can register a limited liability company or with the help of an attorney. Regardless of the method chosen, an operating agreement is usually a separate document and is not required by law to file. This document is used to inform the state where the company is registered about the business practices that will be performed during the life of the company. In real estate, finding a partner is normal and you could wind up with several partners when you create an LLC. The operating agreement is used to specify which partner will have what job and responsibilities for controlling the activities of the LLC.
Some real estate LLCs do not file an operating agreement and are subjected to the terms put out by the state. Each state has statutes that help govern LLC laws. Some are written into law by legislators and others are from successful court rulings. The problem with not filing an operating agreement is the delegation and ownership percentages of each partner or manager. If a legal problem arises over profits or ownership, the state would use predetermined ownership percentages that might not satisfy the financial or time investments of every member, investor or manager. By creating an operating agreement, ownership and investment percentages can be put into the original paperwork and this is what will be used in a court ruling.
Buyouts are not uncommon to do when you have partners in real estate. As time moves forward, things can change and attitudes can prevent proper business dealings with partners. When one person wishes to leave the LLC but others wish to stay, a buyout can be made of the ownership percentage of the vacating partner. This can be put inside of the operating agreement and all partners will be bound by the terms. This is useful to keep the LLC operating without interruptions or dissolving it because of temporary disagreements.
Changing an Existing Operating Agreement
A good thing about operating agreements filed with an initial LLC registration is that agreements can be changed. New partners can be added, released or percentages can be updated when all LLC members or managers agree to the changes. The protection of an LLC for real estate investing is a great thing to have. Most real estate investors are excited to invest and forget about the legalities involved with running a real estate business. Completing and filing an operating agreement can save you from a lot of headaches and problematic scenarios as an LLC owner, partner or manager.