How Limited Purpose LLC Is Created?

A Limited Purpose LLC is created in the same manner as a general LLC. Limited purpose is established only after certain legal language is added to the company agreement or the Certificate of Formation.

Advantages

A Limited Purpose LLC protects the sole asset against creditors from other development projects. Many commercial lenders will also require this protective structure before approving a new construction loan deal.

Disadvantages

A Limited Purpose LLC typically dissolves when development is completed and the property is sold. However, this does not always erase future liability charges. Keep in mind that certain states will allow lawsuits against a Limited Purpose LLC long after its dissolution.

Standing Alone

Each Limited Purpose LLC must keep all its activities, resources, and finances separate, i.e., no commingling. Commingling will trigger Internal Revenue Service (IRS) audits and eliminate its liability protection. This elimination is often called "piercing the veil."

Other Names

Limited Purpose LLCs are also known as Single Purpose LLCs, Single Member LLCs, Special Asset LLCs or Special Purpose LLCs.

Source:

Nolo.com: How to form an LLC

University of Texas School of Law: Effective Use of Special Purpose Entities; David Sewell

Daily Journal of Commerce: Think carefully when creating LLCs; Eric Grasberger

More Information:

IRS.gov: Single Member Limited Liability Companies

Bankrate.com: State by state corporate filing requirements: