Entity Formation and Advice

Typical property buyers or developers will form a new entity for each property they acquire. Taking title in your own name, or as a general partnership, is the simplest approach, but that doesn’t provide the protection of an entity that affords limited liability. Accidents happen, and a property owner can expect to be named in any lawsuits arising from occurrences on (or near) the property. An owner’s first line of defense is always insurance, but that may not be enough. Entities such as corporations, limited partnerships, and limited liability companies add an extra layer of protection, since the owners (other than the general partner of a limited partnership) are generally not liable for the debts of the entity.

Choosing between the various forms of entities requires input from both legal and tax professionals. We’re not tax lawyers, and we don’t give tax advice. But we’re comfortable working with clients’ accountants, and we encourage that interaction whenever possible. The client’s interests are best served when his or her professional advisers each know what the other is saying, thinking, and doing.

When a group of people decide to form a business entity of some kind, their discussions usually focus on two key issues: the economics of the deal (what will the parties’ respective contributions and ownership shares be), and management of the business (who makes the day-to-day decisions, how will major decisions such as refinancing or sale of the property be made, etc.).

But there is a third key issue that is often ignored – exit strategies. What happens if the partners or members can’t agree on major decisions, or one of them needs cash early on, while others are content to keep re-investing in the business? What happens if a partner or member dies, or becomes incapacitated, or gets divorced? A good organizational document will provide answers. The lawyer’s role in creating such a document is to inform the parties as to what might happen, suggest possible solutions, and urge them to agree on methods of addressing the contingencies.

Operating business entities usually need little in the way of legal advice as a result of the entity structure itself. But there are exceptions.

For some years, one of our lawyers represented an unusual joint venture consisting of three owners whose properties were operated as a single building. Two of the owners did not get along well, and much of the building needed to be leased up. As a result, he was continually called on to negotiate the leases, work out issues with each owner separately, and try to achieve a consensus on each lease and its terms. On top of that, he had to help resolve many of the day-to-day operational issues that are normally handled routinely by a general partner or managing member. Sometimes a transactional attorney must be more of a mediator or referee than a lawyer.