Maximizing Real Estate Investments with Limited Liability Companies

1. LLC FORMATIONAND OPERATING AGREEMENTS By: Emily Paust and Derek TaylorHusch Blackwell LLPMay 11, 2019

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

3. 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

4. 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.

5. 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-1s • Ease of management of properties (single purpose entity owning that property)

6. 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

7. 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

8. 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

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

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

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

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

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

14. 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

15. 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

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

17. Thank You! Derek Taylor Partner, Milwaukee 414.978.5748 Derek.Taylor@huschblackwell.com Emily Paust Associate, Milwaukee 414.978.5510 Emily.Paust@huschblackwell.com