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.
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.
There are many benefits to setting up an LLC as a real estate investor. Here are some of the most notable:
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.
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:
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.
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.
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.