Why your annual LLC meeting is a critical part of your real estate investment strategy
Many owners of real estate have limited liability corporations (LLC’s) as part of their ownership structure.
Unfortunately, these same property owners tend not to have their annual meetings and forget to document them if and when they have meetings. This article is a reminder why annual meetings and documentation of these meetings is critical to protect your LLC (corporate) standing.
How a lack of documentation can lead to piercing the veil
Lack of documentation can facilitate the piercing of the corporate veil and create significant risk for an investor. Here are some examples of the risks that exist:
Failure to observe corporate formalities:
A court may decide that the LLC is not a legitimate entity if formalities like keeping meeting minutes, maintaining records, and holding meetings are not followed.
Evidence of a sham:
The absence of documentation suggests that the business is not being run as a distinct entity, but rather as the owner's "alter ego". Additionally if your LLC’s are undercapitalized, this may leave room for a court to decide that the entity was just window dressing.
Risk of personal liability:
If the veil is pierced, a court can hold owners personally responsible for the LLC’s debts and legal obligations, putting personal assets like homes and bank accounts at risk.
Maintaining an Operating agreement
Lack of an operating agreement and registration with the property State and Federal departments (such as Secretary of State and Revenue (Tax) Collection) can invalidate your LLC structure.
Fraudulent Behavior
Using an LLC to deceive creditors (such as lenders) or perpetrating a fraudulent act will allow plaintiffs to pierce your corporate veil.
Steps to take to avoid piercing of corporate veil
You need to document all of your decisions and keep records of all your important business decisions, voting decisions and actions taking during a meeting.
You need to plan on holding regular meetings which includes noticing of meetings, recognition of attendance, reviewing minutes and actions taken during the past 12-month period (fiscal year) and actions you intend to take in the next 12-month period (fiscal year) all of your tracking decisions.
All major decisions such as borrowing money, purchasing and selling a property and changes to business structure need to be approved and documented in the annual minutes.
You need to keep your finances (personal and business i.e. LLC’s ) separate which may mean you should have individual bank accounts and not comingle the funds in your financial statements.
It does not hurt to have annual financial statements . It’s critical to prepare annual LLC tax returns to prove that your entity actually is a separately operating entity.
You must follow all legal reporting requirements with the correct state and federal entities and of course pay income taxes as well to protect your depreciation shelters.
Of course, you need to use the LLC name when you are conducting business and signing documents.
If an in-person meeting is not convenient, you can use internet or phone meetings to gain consent for decisions being made. If you can’t get a meeting scheduled, you can arrange to have a “written consent in lieu of a meeting” to document your decisions as long as all of the members agree with the decisions and you can prove that. Sending copies of your LLC meeting to your attorney can also be seen as a step formalizing the existence of the LLC.
This detail may seem overwhelming, but if you really want the litigation protection of an LLC, you need to consider having all these steps in place and follow through with your annual LLC meetings and their documentation.
Sources
1. https://gusto.com/resources/articles/start-business/limited-liability-protection
Clifford A. Hockley is Principal Broker at SVN | Bluestone, as well as the managing member of Cliff Hockley Real Estate Consulting, LLC. As a Certified Property Manager & Designated Managing Broker, Cliff has 41 years of experience in the brokerage and management of Real Estate companies. Bluestone and Hockley Real Estate Services manages condominium associations, multi-family, and commercial properties in the greater Portland area. He was focused on running the company and involved with investment property brokerage. He worked with financial institutions, governmental agencies, private investors, and not for profit organizations. He also has vast knowledge in budgeting, organizational management, and building structures. His previous experience includes over five years in accounting, production supervision for a manufacturing company, and work for state agencies in California.
Cliff grew Bluestone and Hockley Real Estate Services into a 100 employee company that managed over 2 billion dollars of real estate assets before he sold the company in 2021. He also supervised a sales team of over 15 real estate brokers for over 35 years. His monthly newsletter, QuickFacts has over 2,300 subscribers. He has been involved in numerous real estate transactions that include industrial, retail, office, and multifamily properties. Cliff has also written a book called “Successful Real Estate Investing; Invest Wisely, Avoid Costly Mistakes and Make Money” published by Morgan James Publishing in 2019.
Cliff has successfully coached real estate investors and CEOs located throughout the United States since 2015. He has acted as a sounding board to help untangle knotty issues that need an experienced outside opinion. He guides leaders who find it is “lonely at the top” and need an experienced hand to help set a strategic direction, sort out operational problems and want to talk through challenging business decisions.
He has served as an adjunct professor at Portland State University from 2028 – 2021, teaching classes in: Intro to Real Estate, Basic Real Estate Finance, Property Management as well as Real Estate Investment Fundamentals. He has instructed hundreds of students and believes that substantial preparation and active student engagement are crucial for learning and appreciating the field of real estate. Students appreciate his candor and real-world experience.
Among his many civic activities, Cliff served on the Board of Directors for the Portland Chapter of the Institute of Real Estate Management (IREM) and the Rental Housing Alliance of Oregon. In 2014 he was recognized by IREM as board member of the year, and in 2015 he earned an achievement award in brokerage from SVN International. In the years 2000 & 2003, he was recognized by IREM as Certified Property Manager of the Year.
