Real estate investment can be lucrative, but it’s not without risks. To set yourself up for a more successful career, it's important to find ways to hedge against those risks. That's why many real estate investors are starting to explore the potential of using a limited liability company (LLC) to organize their business.
Regardless of how long you’ve been investing, this move can be beneficial. Plus, it’s a lot easier than most people think. You can form a real estate LLC with a few simple clicks by yourself or with help from a convenient registered agent service.
What Is an LLC?
An LLC is one of the simplest business or legal entities you can form within the United States. Essentially, they perform most of the functions of a business but are simple to form and run. The primary benefit of an LLC is that it shields an individual from the business’s debts or liabilities. LLCs can be large or small and are typically governed by the rules of their home state.
The Benefits of Using an LLC for Your Real Estate Investments
There are many benefits to setting up an LLC as a real estate investor. Here are some of the most notable:
An LLC Offers Personal Liability Protection
Undoubtedly, the most important benefit of setting up an LLC is that it offers personal liability protection. This means that you as the founder or owner of the LLC cannot be held liable for debts, damages, or legal action against the company. If your property loses money or someone sues your LLC, your personal assets cannot be exposed.
It's a More Professional Option for Your Business
On paper, an LLC just looks more professional. If you’re involved in larger transactions or commercial real estate, some people are more comfortable dealing with a formal business than with an individual.
An LLC can operate as a "pass-through" entity, which means business profits go to the organization members without being taxed at a company level.
Taxes on the profits are instead paid through individual federal tax returns. With this system, filing taxes can be easier because you can choose how your business will be taxed.
For example, you can choose to be taxed as a sole proprietor, C corporation, S corporation, or a partnership.
Additionally, operating as a pass-through entity can help you avoid double taxation.
When you form an LLC, certain business-related expenses may be eligible for tax write-offs. In turn, this will decrease the amount of money owed in taxes for the LLC.
Known as "deductions," what you're able to deduct and classify as a business expense varies from business to business. For a real estate investor, common deductions include:
- Expenses for business-related travel
- Property repairs
- Legal services
- Charitable giving
And many others. To determine what you can and can't write off come tax season, you may find it helpful to work with a tax professional.
Transferring Membership Interests Is Simple
If you ever want to transfer your real estate investment business or holdings to another individual or company, an LLC makes this process much simpler. In the event of a sale, the LLC continues to hold the real estate regardless of who owns the business.
How To Form an LLC for Your Real Estate Investing Business
It may seem complicated to set up an official, legally recognized business, but forming an LLC is easy. Here’s a simple guide on where to start.
- Read the rules of your state. LLC regulations vary state by state, and it's important to understand the policies you'll need to follow.
- Come up with a name for your LLC, then run a search on your Secretary of State’s website to see whether it’s been taken. If it hasn’t, you’re good to go.
- Select a registered agent (this is the person who will receive correspondence on behalf of your LLC).
- File an Articles of Organization document, which you can find on your Secretary of State’s webpage.
- Obtain any business licenses, permits, and tax identification numbers your state mandates. At this point, some states also require new businesses to publish their intent to form in a local newspaper.
- Create an operating agreement. This should include the management structure of your LLC, including the powers and duties of each member of the organization. Depending on the state you live in, you can either have an oral or written agreement. An operating agreement isn't required in most states, however, it's wise to draw one up.
- Create your business checking account. When establishing your LLC you may find it easier to keep business and personal expenses separate. This is important if personal assets are at risk due to questionable practices within the organization.
If this seems complex, there are also registered agent services that can help you form your LLC and take care of the annual paperwork on your behalf.
Forming an LLC is just one way to set yourself up as a more professional and profitable real estate investor. For more helpful resources on real estate investment, check out the PropStream Academy.