Marcus Adams Capital LLC is a new business creation machine. Every time the L.A.-based investment firm buys a new piece of property, it forms a new limited-liability company.
On complex deals, it may form more than one LLC.
“Just this year alone, we’ve created 18,” said Bob Pardo, president of Marcus Adams Capital. “It’s a lot easier structure to use than the limited partnership, which for decades had been favored for real estate.”
All told, 64,000 LLCs were created during the 12-month period ending June 30. That constitutes an 18 percent jump from a year earlier. (The state does not have figures for L.A. County because it does not track new business filings geographically.) The number of new corporation filings jumped by 6 percent.
“These figures are a mark of the general increased economic activity in California,” said Secretary of State Bruce McPherson, whose office compiled the numbers.
Limited liability companies, or LLCs, are essentially a hybrid company structure. They offer a partial shield of liability for the principals that a corporation provides, so that investors or partners in a venture can’t have all their personal assets seized if the venture goes south or lawsuits arise.
But LLCs use the tax structure of a partnership in which the principals pay income taxes based on their share of the profits of the business. There is no additional corporate tax.
“This is mainly real estate transaction driven and for the last couple of years, we’ve been on the upside in the real estate sector,” said Andrew Raines, a partner in the Brentwood law firm of Advisors LLP, who said he has seen a spike in investor clients seeking to purchase properties using the LLC designation.
At Marcus Adams Capital, Pardo said lenders now require the additional liability shield that an LLC provides, as well as a separate entity that can smooth the way for foreclosure proceedings should a deal go south.
LLCs are listed with the Secretary of State’s Office as a category of new business filings. But in many cases, they are really just investment vehicles.
This offers another explanation for why economic activity in the region appears robust while payroll job creation has been mediocre.
“To the extent limited liability companies are investment vehicles, they don’t create direct jobs,” said Esmael Adibi, director for the Anderson Center for Economic Research at Chapman University. “There may be some indirect or temporary jobs, like fixing up a property you purchase, but it’s not like forming a corporation and going out and hiring people to run the operation on a permanent basis.”
Adibi said the more important figure for job creation is the 119,000 filings for corporations in the 12 months ended June 30, up 6 percent from the prior 12-month period.
“That’s where the good news for the economy really lies,” Adibi said.
Easier path
The barriers to setting up corporations in California are substantial, including high incorporation fees and a hefty ongoing tax bill. In recent months, the California Franchise Tax Board has started investigating the phenomenon of California companies incorporating in Nevada, specifically to escape these fees and taxes.
LLCs don’t carry these burdens, which is one reason why they quickly swept the country after they first appeared about 20 years ago. California was one of the last states to adopt the LLC designation in 1994. Ever since then, real estate investors have been among the most frequent users of the LLC designation in the state.
LLCs offer a simplified structure for real estate transactions.
“With partnerships that were formed for transactions, you used to have to form a corporation specifically to protect the general partner, in addition to the partnership, which meant yet another layer of complexity,” said Brad Cohen, president of Cohen Asset Management Inc., an L.A-based real estate investment firm that has set up about a couple of dozen transaction-based LLCs in the past year.
Cohen said that his firm’s use of LLCs has increased, along with the number of transactions in the region’s hot real estate market.
Small companies and solo practitioners also use LLCs to avoid personal risk. Some are startups; others are partnerships seeking more of a liability shield.
“A lot of small businesses are using LLCs, especially when they start out. They want liability protection for the partners,” said Sanford Holo, partner at the law firm of Musick Peeler & Garrett LLP.
Holo, who does not practice in the real estate area, said he has not observed a marked increase in LLC formation. “It’s been a pretty steady flow,” he said.
