For many, cabins provide an opportunity to get away from it all, to spend time with family and friends (maybe beside a body of water) and decompress from daily life. Unfortunately, cabins can also cause frustration and confusion as to how families (immediate and extended) will share it and how the cabin can be passed on to future generations. One way to alleviate this frustration and confusion is to form a cabin limited liability company (LLC).
As discussed in previous posts (see Jen Santini’s Limited Liability Company in Estate Planning, Kate Wells’ Basics of Business Formation), LLCs can be very useful tools. In this instance, an LLC can be created to own and manage a family cabin. The LLC and its owners (the LLC members) can create a Member Control Agreement for the LLC that clearly sets out the rules and responsibilities for managing the LLC and the cabin property over time. The main issues to consider with a cabin LLC are 1) management, 2) transfers of interest & valuation, 3) use of the cabin and 4) costs associated with the LLC.
An LLC can be managed by the members directly (or, in some cases, a Board of Governors). In a member-managed LLC, members have a direct role in the management of the LLC and have the opportunity to vote on major issues associated with the LLC. Typically, some members are considered managers of the LLC and fill such rolls as Chief Manager or Treasurer. It is important to consider which members have the best qualifications and skills to act in the manager roles.
Transfer of Interest and Valuation
One of the main reasons that people often create cabin LLCs is to protect who can and cannot be members of the LLC. The Member Control Agreement generally lays out who can become members (usually family members of certain persons). Generally, spouses (in-laws) are not eligible to become members. However, each agreement is different and depends on the needs and wishes of the family. Another big reason to form a cabin LLC is to protect membership interests from creditors of members (often called a “prohibited transfer”). Again, the Member Control Agreement would spell out the terms of what is and is not a prohibited transfer.
For those prohibited transfers, the Agreement should address how other members of the LLC can buy those member interests that are transferred. Usually, one to three appraisals would be completed to determine the value. In some instances, the members could agree on a value for each interest annually, or utilize some other type of method (i.e., the property tax value of the cabin).
Use of the Cabin
Other important terms of a Member Control Agreement relate to who will use the cabin and for what periods of time.
A cabin, as any owner knows, generates cost each year. Therefore, once the cabin is an asset of the LLC, the LLC will be responsible for these costs and the members will be required to contribute funds to cover costs. The required annual contribution of each member should be sufficient to cover all expenses, both annual operating expenses and long-term costs. Again, the Member Control Agreement should lay out the method for determining the annual contribution by each member and address consequences for a member who fails to contribute.
As always, given all of the above, it is always smart to consult an attorney or CPA in your area to discuss the pros and cons of a cabin LLC for your particular situation.