A limited liability corporation is a simple legal entity that is cheap and easy to set up, and allows for management of assets (such as land) via an LLC operating agreement.
What are the primary reasons to use an LLC to own land as a group, rather than subdividing it after purchase into individual titles?
Intentional Neighborhoods
Choose your neighbors.
Choose them wisely.
One of the main benefits of an intentional community or neighborhood is the ability to choose your neighbors. Normally this is not possible! Your neighbor has inalienable property rights, which means he can sell to whomever he wants.
Administration of the group property
An LLC, via its operating agreement and its elected board of managers, can allocate land to the LLC members for private homestead use, and can administer common elements such as roads, perimeter fences, and a community center.
Legal Fail-safes
If the LLC were to dissolve for any reason, your operating agreement should specify that the land will be subdivided and transferred to the individual owners, with easements for common elements.
The most important factor in the success of your group land buy is the LLC Operating Agreement.
You need to be sure it is well-written and covers all eventualities.
The LLC provides much more legal protection to the community, and creates a functioning community long-term, whereas a Tenency-in-Common scheme (multiple owners directly on the land title) can lead to serious problems:
| Issue | LLC | TIC |
|---|---|---|
| Creditor seizes assets of a bankrupt owner | Share transfer restrictions in an MM-LLC can prevent the creditor from being able to sell to an unapproved person, exercise voting rights, or access the property | You now have a random person co-owning your property! |
| Co-owner goes crazy, starts sending long ranting emails | Operating Agreement can allow the board to ex-communicate the person or take other corrective measures | You have to deal with him, sorry! |
| Owner sues for forced partition | He can’t! The LLC owns the property. | You lose the suit and have to pay legal and partition costs, land gets subdivided, no more community. |
| Zoning laws change! Limit of one residence per parcel. | The LLC can just subdivide the land itself, maintaining ownership and thus control over who the LLC shares are sold to. The community lives on. | You can’t build any more homes, you now have to subdivide if some owners haven’t built their homes yet No more community. |
| Owner refuses to pay for reasonable maintenance costs of common elements | They are contractually obligated to. You can win a lawsuit against them, or reduce their membership percentage to compensate. | There is almost nothing you can do. If you had a private contract with them obligating those specific costs, you may be able to enforce it. |
| Somebody sues you, an LLC member, and wins. You can’t afford it. | They can put a charging order on your LLC share (future compensation if sold) but they can’t take it from you. | They can take your land. |
| Somebody sues the property owners as a group, whether LLC or TIC. They win and it’s a huge judgment. | The maximum you can lose is the land, not even the private assets on it (houses etc) assuming your operating agreement specifies this. It’s real bad but it doesn’t ruin you. LLC = Limited Liability! | You can lose the land, everything on it, and everything else you own (unrelated assets like cars, properties elsewhere, etc.) LLC = Limited Liability! TIC does not provide that protection. |