California LLCs for Real Estate: To Use or Not to Use? That is the Question

When individuals start any type of business venture, choosing the right corporate structure is essential for limiting personal liability, defining the structure of the business, determining what they will pay in taxes, and what compliance requirements the business will face. Limited liability Companies (LLCs) are often popular because they are a simple and flexible corporate structure. However, those forming LLCs in California should be aware of when to use them and when not to use them.

When to Use LLCs for Real Estate Purposes?

LLCs are routinely used by real estate investors to hold real property in California. There are two reasons: 1) LLCs allow for much better tax treatment of the real property; and 2) They give the same kind of liability protection that a corporation can give the investor if the investor complies with the formalities required by the Corporations Code.

When not to use LLCs in the context of Real Estate?

1)Broker’s Licenses

In California, a real estate broker’s license can only be issued to a corporation or an individual, not an LLC. So although investors should use LLCs, Real Estate Brokers may not use LLCs to hold their license to perform broker services.

This was first established in former California Corporations Code § 17002(c), which stated: “a limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code if the applicable provisions of the Business and Professions Code authorize a limited liability company to hold that license, certificate, or registration.” While the provision was updated in Corporations Code § 17701.04(b), the prohibition against authorizing the licensing of LLCs as brokers under the real estate law remains. Although efforts have been made to remove the restriction—most recently in 2019, when Assembly member Tom Daly introduced AB 687—no attempt has succeeded.

2)When managing your own Property:

Can managing a company’s real estate holdings accidentally make one a broker? A “real estate broker” is defined in the Business and Professions Code § 10131 as “a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of the following acts for another or others…”. The acts listed are: buying, selling, renting, and collecting rent on real property. So when an officer of a corporation or a general partner of a partnership buys, sells, or manages property, they could be considered “Brokers”. But there is an exception:

Business and Professions Code § 10133(a) basically states that so long as the buying, selling or managing of the property is done by “[a] regular officer of a corporation or a general partner of a partnership” with respect to “real property owned or leased by the corporation or partnership”, they will not be considered Brokers if it is in connection with the proposed purchase or leasing of real property by the corporation or partnership, and if the acts are not performed by the officer or partner in expectation of special compensation.”

In simple terms buying, selling and managing a corporation (or partnership)’s property, will not accidentally make you a Broker (who needs a Broker’s license), as long as you are an officer of that corporation, but only for corporations and partnerships. The Code is silent about LLCs.

So if you are going to manage property, you must make sure a better structure is in place for guarding your investment, favorable tax treatment, and the ability to manage it yourself.

Your Legal Resource for Real Estate Business Success

When you want to make the most of your real estate opportunities, sometimes the law is ambiguous so having the right legal team at your side, can lower your risk of liability and protect you if you are threatened with a lawsuit. The expert real estate team at Ghassemian Law Group understands the nuances of California’s laws and can help provide essential guidance from the start to help you avoid unanticipated hazards to the success of your enterprise, including providing advice on the most suitable type of business entity for your particular case. We are dedicated to combining the level of expertise found at the largest law firms with the personalized attention and service you expect from a small firm. If you have questions about California’s real estate law and your business entity, contact us to schedule a consultation today.