If you own a building in your personal name, then you’re opening yourself up to a world of liability. Let’s say you’re a landlord. A tenant sues you over repairs you may or may not be obligated to make. A judge rules in the tenant’s favor. Not only will you be personally obligated to make said repairs in a timely manner, but you also could be personally liable for significant monetary damages.
For this reason, transferring ownership of the building to a corporate entity now is a good idea. It will help you avoid a world of financial and emotional hurt in the future. It will create a layer of protection between you and any legal or financial threats. Any liabilities that arise from the building will be shifted away from you and to the entity. This is especially important if the building is used for commercial purposes, as the risk of liability is higher for commercial landlords than it is for residential ones.
To transfer ownership of your building to a corporate entity, you must first create either a corporation or limited liability company by filing articles of organization with the New York State Department of State. After obtaining an Employer Identification Number (EIN), drafting an operating agreement, and meeting New York State’s corporate publication requirements, you will “safely” be able to transfer ownership of the building by quitclaim deed. The quitclaim deed will be between you, as the current owner (grantor), and the entity (grantee).
Be aware of the tax man! Transferring ownership to a corporate entity will have tax implications. For example, there can be a transfer tax that applies when ownership is transferred. In New York City, there may also be a mortgage recording tax that applies when a mortgage is recorded against the property. Please consult with your accountant or a qualified tax professional to understand the tax implications of making such a transfer.
There are also legal considerations. For example, if you’ve taken out a mortgage against the property, you may need to obtain consent from your lender(s) or mortgage holder(s) before transferring ownership. Be sure to review your loan documents to see if such a transfer or assignment of mortgage is permitted.
Additionally, you need to be concerned with a legal doctrine called “piercing the corporate veil.” This permits a court to hold the owners of a corporation personally liable for the corporation’s actions. In other words, the legal protections that a corporate entity typically provides its individual members would be ignored. The individuals “behind the veil” would subsequently be held responsible for the corporation’s debts, obligations, and legal liabilities.
To reduce the risk of a court piercing the corporate veil, consider the following steps:
- As discussed above, the corporation must be properly formed and maintained. All legal requirements for forming a corporation must be followed. This includes filing the appropriate documents with the state, obtaining necessary licenses, and complying with all state and municipal tax requirements.
- Building owners must ensure that the corporation is adequately capitalized. This means that the corporation has enough assets and resources to conduct its business operations without regular, large contributions and commingling of funds from its members. If the corporation is undercapitalized and cannot meet its obligations, a court may decide to pierce the corporate veil and hold the owners of the corporation personally liable.
- The corporation must operate as a separate legal entity from its individual owners. The corporation must have its own bank accounts, its own records, and its own accounting systems. The corporation must conduct its business in its own name. If you conduct corporate business through your and/or the other members’ names, this will expose all building and corporate owners to personal liability.
To that point, building owners cannot abuse the corporate form to shield themselves. Do not commingle your personal and business assets. As a lawyer, I must remind you not to use the corporation as a vehicle for fraud, illegal activities, or other wrongful conduct.
Transferring ownership of a building to a corporate entity is a smart decision for reducing your personal liability. I’m hopeful this article helps point you in the right direction for doing so.
If you need help setting up a corporate entity, or if you need help transferring ownership of the property, please don’t hesitate to reach out to me for a free consultation.
Pete Weintraub is a business and real estate attorney. He handles the transactional department at Esagoff Law Group, P.C. For more information, call 516-304-5944 or schedule a free consultation with Pete or a member of his firm by emailing firstname.lastname@example.org.