Why You Should Form an LLC for Your Family’s Lake Property or Cabin

Uncomplicate your life so you can spend more time enjoying it.

Having lake property or a cabin up north is the dream of many Wisconsinites. If you are lucky enough to have such property, then you will want your children and grandchildren to enjoy it as well. The easiest way to leave the property to your children is through your Will. The problem with this approach, however, is that it can lead to issues between your children, or even your grandchildren.

With multiple family members sharing in ownership, there canand will bedisputes. For instance, disputes can arise if:

  • Some family members may use it more than others.
  • Family members want to use it at certain times.
  • An owner may balk at paying his or her share of routine maintenance, needed renovations, or property taxes.
  • A brother or sister may prefer to liquidate his or her interest in the property, and the other siblings do not have the immediate funds to buy out their brother or sister.
  • One child may sell or leave his or her interest to a non-family member, such as a spouse.
  • If a co-owner faces divorce, their interest could become an issue in the divorce.
Any of these issues can pose a real threat to the property and family structure and can lead to litigation, a forced sale, or a breakdown in family relationships.If you wish to keep the cabin or property in the family, forming a limited liability corporation, or “LLC”, for the property is often recommended. An LLC is commonly used for business purposes, but there is no reason why you can’t use one in this context to preserve the property for your family and future generations. Corporate ownership can be set up to be perpetual until the owners file certain documents to terminate it.

An LLC is a business structure that is often described as a hybrid between a partnership and a corporation. It combines the pass-through taxation of a partnership with the limited liability protections of a corporation. With an LLC, ownership is assigned to family members, and management is vested in them or to one person.

An LLC requires an operating agreement to govern its affairs.  Through the operating agreement, you can address various issues that would arise.  For example, you can govern how decisions will be made (e.g. by majority vote, unanimous, or by certain family members).  You could also require that some major decisions be made by more than a simple majority, while other day-to-day decisions can be made by a designated person.  The agreement can include provisions to address how repairs or taxes are to be paid and a method for deciding what times family members may use the cabin.  Finally, the agreement can govern what happens to someone’s interest in case of death or divorce, rights to buy-out family members, or other matters that may arise.  

Setting up a structure now can help ensure that your intended gift of the property to your family will promote family relationships, rather than tear them apart when issues arise.Liability in case of accidents is a concern for any property owner. Owning the property through an LLC can help insulate family members from personal liability if someone should be injured on the property from swimming, boating, or snowmobiling (or even partying!).

It is extremely important that you and your family members treat the LLC as a separate and distinct legal entity. You should set up a separate checking account for maintenance and repairs or other purposes. Never use the account for personal reasons and do not commingle personal funds of the LLC. Hold annual owner meetings and have someone take minutes or notes of the meeting and preserve them in your LLC record book. Yearly filings with the Department of Financial Institutions must be done as well to keep the LLC in good standing with the State. In the event of an accident or lawsuit, a review of the business records and your actions could undermine the LLC status, or have “pierced the corporate veil” so that your and your family members’ personal assets would be at risk; this is why proper formation and organizational matters are so important.

In addition to proper legal organization, you should have insurance on the property to guard against lawsuits.  If a judgment exceeds the policy limits, a properly formed and governed LLC is essential to help protect your personal assets.

Consulting with a business attorney about proper organization of an LLC can help avoid liability and future discord in the family.  Planning today can help ensure your family property will be used and enjoyed by your family for generations to come.