Liability Protection from Owning Commercial Property in an LLC

Being a commercial tenant can be tough and limiting. For many small business owners, owning the real estate on which their business will operate provides several advantages including, but not limited to, autonomy, control over the premises, fixed occupancy costs, and asset diversification. But with ownership of the real estate can come increased liability, as well as additional obligations related to the premises. For instance, if a person slips and falls on property owned individually by the owner, then the owner may face liability as an individual, which may jeopardize personal assets such as the owner's home, bank accounts, and other tangible and intangible personal property. For many small business owners, the balance between the flexibility that comes with owning the commercial property from which they operate their business, and protecting themselves and their business from increased liability, may come in the form of the limited liability company ("LLC").

Keeping Commercial Property Separate from Operating Business:

In the case of owner-occupied commercial real estate, it may be beneficial, for liability purposes, if the ownership of the real estate is structured in a manner in which the ownership of the real estate is separate and distinct from the ownership of the business assets. Take, for example, a small business owner (we'll call him Jason) operating a local pet store. If Jason decides to purchase the real estate on which he operates his pet store, it may be advisable that Jason have two separate LLCs, one LLC to purchase and hold the property (the "R/E LLC"), and the other LLC for operation of the pet store business (the "Operating LLC"). The property would be deeded in the name of the R/E LLC, and then the Operating LLC would become the tenant of Jason's R/E LLC. This ownership structure works to keep the Operating LLC's liability separate and distinct from that of the R/E LLC. Thus, if the Operating LLC is found liable for damages resulting from a lawsuit, in most instances, such liability will only flow to the assets of the Operating LLC, protecting the R/E LLC from any such claim. Had the ownership of the real estate and the assets of the pet store business remained in one LLC, then both the real estate and the business assets would have been subject to any judgment levied against the singular LLC.

Multiple Properties:

The LLC form may also be useful to Jason during the successful expansion of his company. If Jason decides that the growth of his pet store and the demand for his products and services require additional locations, then Jason may want to form a new LLC for each new property that he purchases for additional store locations. Forming real estate holding LLCs for each separate property helps ensure that liability flowing from one property will not bring liability upon another property. For example, using the scenario above, if Jason were to purchase a new piece of property for his next store, and such property is deeded to the original R/E LLC, then a slip and fall on the original property would expose both the original property and the new property to potential liability because both properties are assets of the R/E LLC. Dividing the real estate assets among separate LLCs will, in most cases, insulate real estate owned by each LLC from liability incurred by separate LLCs.

Cannot Avoid All Types of Liability:

While useful, the LLC form is not a foolproof method of shielding individuals from all liability. It is important to note that the LLC form will not protect Jason, and any additional owners of the R/E LLC, from any and all liability associated with real restate ownership. For instance, if, after the purchase of the real estate, Jason builds a porch on the front of the building in a negligent manner, and then the porch collapses at the store's grand opening causing injuries to several patrons, then it is unlikely that Jason will be able to avoid personal liability for his negligent construction of the porch. For that very reason, owners who own commercial property in an LLC should take the additional step to obtain insurance products that will cover a wide array of potential liabilities.

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Overall, the LLC can be a valuable tool in structuring the ownership of commercial property, but it is not the only possibility. Additionally, if the LLC form is right for your business, then adherence to the formalities of the New Hampshire Revised Limited Liability Company Act is critical when seeking the liability protection afforded by the LLC form. Our Startup Team can help you run through the different options, find the best fit for you and your small business, and guide you through the often confusing formalities of the law. If you have any questions, or would like to set up a meeting with a member of our Startup Team, please email us at StartupTeam@devinemillimet.com. We look forward to hearing from you!

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This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Devine, Millimet & Branch, Professional Association makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.

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