From The Desk Of Herb Fineburg
To the great relief of Pennsylvania taxpayers, on December 31, 2015 the Pennsylvania Capital Stock Tax imposed on limited liability companies (LLCs) finally expired. Oddly, the Capital Stock Tax treated an LLC as if it were a corporation subject to the stock tax, even though most LLCs are taxed as a partnership or sole proprietorship which are not otherwise subject to the Capital Stock Tax.
Unlike other states, before the tax law change in order to have the benefits of limited liability, Pennsylvania real estate was primarily acquired in the name of a limited partnership in order to avoid the Pennsylvania Capital Stock Tax. However, a limited partnership requires two (2) entities and thus, is a far more complex structure than an LLC.
Everything has changed in Pennsylvania with the elimination of the Capital Stock Tax on LLCs. Starting in 2016 all real estate can now be acquired in the name of an LLC so that the investor receives limited liability benefits. Although a property owner can buy liability insurance, it is extremely beneficial to know that the investor has no personal exposure to his or her other assets to the extent insurance coverage is insufficient (e.g. claims are in excess of coverage) or insurance coverage on a claim is denied. The concept of corporations, limited partnerships and LLCs is to avoid personal exposure to investors beyond their investment in the entity.
In almost all states a real estate investment is typically made in an LLC for asset protection or limited liability protection. The one exception might be your personal residence so long as it is not leased to others such as vacation rental property. Besides asset protection, an LLC provides the owner with anonymity and the ease in transferring partial ownership for estate tax planning purposes. For example, you can transfer a partial ownership to your children, trusts or third parties without having to prepare a deed and in certain situations without having to pay costly Pennsylvania or local (e.g., Philadelphia County) transfer taxes. In addition, those transfers can be made at discounted values to save on your gift and estate taxes.
Finally, the United States is one of the easiest nations in the world to form a limited liability company without disclosure of the name of the LLC owner/member. See CBS, 60 Minutes, January 31, 2016. The ease and simplicity of anonymously forming an LLC in America is one reason it is reported, for example, that almost all of the condominiums in New York City buildings, such as the Time Warner Center and Trump Towers, are purchased in the name of LLCs. Although LLCs are perfectly legitimate estate planning and asset protection vehicles, because of the anonymity and ease of formation, LLCs are also sometimes used by foreign investors and used as shell companies for illegal activity. See the 2015 five part series in The New York Times, “Towers of Secrecy”. However, the vast majority of LLCs are for perfectly valid purposes, and recommended uniformly by legal advisers.
If you want to find out more about LLCs or how to title your next real estate investment, please contact us.
ABOUT HERB FINEBURG
Mr. Fineburg concentrates his practice in the areas of Business Law and Transactions, Mergers and Acquisitions, Estate planning, Estates and Trusts, and Tax Consulting. He is recognized as one of Philadelphia’s most respected business lawyers whose substantial knowledge of tax law provides clients with strategic and cost-saving benefits in connection with commercial transactions, taxation and wills, trusts and estates matters. Known for his ability to resolve complicated matters effectively, Mr. Fineburg has assisted businesses and individuals with the organization of their finances, business and real estate affairs, and the structure of their assets (i.e., in LLCs, partnerships, corporations, trusts or joint ownership). He has substantial expertise in the preparation of buy-sell agreements for co-owners who are family members or are unrelated business partners. In addition, to working on bank financings, business contracts and employment matters for his business clients, Mr. Fineburg also provides advice on business acquisitions and sales, and the resolution of shareholder and partner disputes and buy-outs.
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