Investment Properties and Limited Liability Companies

Most real estate investors understand the importance of using a limited liability entity to buy and sell property and to hold property for rental income.  Many of these investors form a separate Limited Liability Company (LLC) or entity for each property they purchase.  Unfortunately, some investors inadvertently do not comply with the basic “corporate” formalities required by state law when it comes to investment properties.  Being non-compliant with entity formation, registration or reporting required by state law can be costly to investors. 

Many investors see certain advantages to forming their limited liability entities in states other than North Carolina.  If such an entity is not registered with the North Carolina Department of the Secretary of State, or if the entity is administratively dissolved by the Secretary of State for failure to file an annual report, the investor’s entity cannot avail itself to the courts of North Carolina as a plaintiff. 

This can be fatal to an investor-landlord’s summary ejectment case against a tenant. The case will be barred until the entity is properly registered with the Secretary of State. Once the entity has been registered (or re-registered) with the Secretary of State, the summary ejectment case must be re-filed - all of the filing fees must be paid, again, and new service of process on the tenant must be obtained.  The additional cost in money and time can be very frustrating to investors.

Registration with the Secretary of State is also important when real estate investors contract to sell real property vested in the limited liability entity.  Under a rare exception of the “winding-up” the business of the entity prior to a dissolution, all limited liability entities should also be in good standing or registered with the Secretary of State prior to the sale of property owned by that entity.  Failure for the entity to be in good standing can result in a delay in closing until the entity status is remedied with the Secretary of State.

In an effort to avoid delays in closing, some agents and buyers investigate the status of an investor’s selling entity prior to entering into an Offer to Purchase and Contract.  The Corporations Division of the North Carolina Department of the Secretary of State oversees the registration of all limited liability entities in North Carolina and can be contacted by calling 919-807-2225.  Agents and buyers can conduct their own search for the status of an LLC entity through the Secretary of State’s website or better yet, contact your favorite closing attorney for assistance.

Published by John F. Renger on February 4, 2016