LLC FORMATION AND OPERATING AGREEMENTS By Emily Paust

LLC FORMATION AND OPERATING AGREEMENTS By: Emily Paust and Derek Taylor Husch Blackwell LLP May 11, 2019

Ways to Own Real Estate • Individually • Through an entity (LLC, partnership, corporation, etc. ) • Through a trust • Tenants in Common

Limited Liability Company Advantages • Pass-through taxation – no double taxation • Members not personally liable for actions / debts of the LLC (subject to piercing of corporate veil) • No restrictions on number or status of members • Multiple classes of membership interests permitted • Management and economic interests may be assigned as members desire • Few restrictions on transfers of membership interests except as determined by members • Corporate formalities may be limited by members

Limited Liability Company Disadvantages • Operating agreements may be complex in order to address many matters left to members • Members may be subject to self-employment taxes depending on the nature of the business and a member’s role – Generally, active members and member-managers are subject to self-employment tax. – Non-active members and returns on capital contributions are not subject to self-employment taxes.

Practical Reasons to Form an LLC • Estate Planning: life-time transfer planning and post-death transfers • Anonymity in owning real estate and making offers to purchase real estate • Tax Planning: K-1 s • Ease of management of properties (single purpose entity owning that property)

Limited Liability Company • Distinct legal entity, typically not subject to entity taxation • Profits and losses passed through to members (if taxed as a partnership) • Owned by one or more members • Managed by members or managers appointed by members

Limited Liability Company Formation / Administration • Formed by filing articles of organization with secretary of state – Filing articles costs $130. 00 – Expedited filing costs an additional $25. 00 • Annual Compliance – Annual reports are due in the quarter in which the entity was formed – Annual reports cost $25. 00

Limited Liability Company Administration • Governed by operating agreement between members (written agreement is not required in Wisconsin but is preferable) • Capital raised by members making capital contributions in exchange for membership interests • Few administrative / corporate requirements

Operating Agreements • Technically not required • Having one makes it easier for other entities to work with the LLC • Make sure everyone is on the same page.

Operating Agreements Key Factors to Consider • Ownership • Capital Required • Management and Control • Other Considerations

Ownership • Who will own the company? • How many owners? • How will ownership interests be divided? • Will the interests have different rights?

Capital • How will the company be capitalized? • How can the company raise additional capital?

Management and Control • Manager-managed vs. Member-managed. • Who will manage operations / control direction of the business? • How much control do the owners want? • What level of management is required?

Other Considerations • When and how can membership units be transferred? • Third-party transfers. • Tag-along and drag-along rights. • Admitting new members. • Spousal Consents • Divorce • Death

So What? Why this matters for you and your business. . . • Avoid personal liability • Comply with laws and regulations • Minimize taxes • Minimize administrative burden • Maximize opportunities with investors/buyers

Legal Counsel Operating Agreements deal with a lot of complex, taxation and management decisions. It is always best to have a legal professional assist with the preparation of the organizational documents.

Thank You! Derek Taylor Partner, Milwaukee 414. 978. 5748 Derek. Taylor@huschblackwell. com Emily Paust Associate, Milwaukee 414. 978. 5510 Emily. Paust@huschblackwell. com