Buying U.S. real estate in your own name or through an LLC: why the choice takes so much thought

The leading reason people consider an LLC is liability protection. If a tenant is injured, a dispute arises over building management, or a lawsuit comes out of renting or operating the property, liability can attach directly to you if the property is in your own name, but if it is held by an LLC, liability is in principle limited to the entity. So the idea that buying through an LLC protects your personal assets is correct in principle. There is, however, an important condition attached.

A concept that must be addressed with any LLC structure is piercing the veil. It is the doctrine under which, if an entity is found to be no different in substance from an individual despite its outward form, the entity is disregarded and the individual is held liable. Its purpose and direction are quite similar to Korea's doctrine of disregarding the corporate entity. In both countries the doctrine applies only in exceptional cases, but in the United States it does become a real issue, depending on the facts, for small single-member LLCs where funds are commingled or formalities are not observed. In other words, simply forming an LLC does not automatically give you protection.

In practice, problems arise less from the LLC itself than from LLCs that exist only on paper.

• All funds go out directly from a personal account
• There is no account in the LLC's name and no separate accounting
• The individual personally continues to handle all management and decisions

With a structure like this, the question arises whether this is really real estate owned and operated by an individual. So if you are considering an LLC, it is not enough to put the title in the LLC's name; you need to make sure the operations, funds and management also look like the LLC's in substance.

Flexibility in tax structure is often cited as another advantage of an LLC. Under U.S. tax law, an LLC can elect how it is taxed, and the structure and timing of how income is attributed vary with the owner's status and the method chosen. That is why people say it allows more flexible planning than holding property in your own name. This is not wrong in itself, but it only matters when the LLC is properly designed, and the results also differ depending on the owner's status.

The problem arises the moment the matter is connected to Korea. Korea does not look only at the form of a property being held in a U.S. entity's name; it reassesses, based on substance, who provided the funds, who actually controls and manages the property, and whether the investment is individual or corporate. As a result, even an investment made through an LLC is often treated in Korea as an individual's overseas real estate investment in the end. In that case, the advantages of the LLC shrink, and the structure you have to explain can actually become more complicated.

Another factor is whether you are a resident under Korean tax law. Living in the United States does not automatically make Korean tax issues disappear, and the scope of taxation depends on whether you are a resident or a nonresident under Korean tax law at the time of sale. The question of LLC or individual title and the question of residency are separate factors, but in actual outcomes they work together.

It is hard to say across the board whether holding in your own name or through an LLC is better. But if the following points are not reviewed together in advance, your options later will be much narrower.

• Why you are considering an LLC
• Whether a structure that matches that reason in substance is in place
• How this structure will be assessed in Korea
• Whether your residency status under Korean tax law has been sorted out

An LLC is certainly a useful tool, but if you expect limited liability, you need the substance to match, and if you expect flexibility in tax structure, you need a structure that can also be explained in Korea. Especially if you are a Korean resident or still have ties to Korea, the matter is difficult to resolve under U.S. law alone or under Korean law alone, so the transaction structure needs to be looked at as a whole.

Related U.S. practices: Corporate & Business Advisory