It should go without saying, but any attempt at starting a real estate investment LLC should be met with the utmost diligence. Consult a legal professional before structuring your business entity, as to make sure everything is in place and that everything is handled accordingly. However, for those of you looking to get the ball rolling, here are some of the reasons you may want to consider starting a real estate investment LLC.
Starting an LLC for real estate is the first step towards becoming a successful business owner, and something aspiring investors must consider if they are to be taken seriously. If for nothing else, structuring your business behind the protection of an LLC is the surest way to protect yourself from the unknown.
LLCs aren’t the only form of protection real estate investors are awarded when they set out on their journey; there are a number legal entities vying for position. It’s worth noting, however, that as a real estate investor, LLCs offer some great advantages. And while that’s not to say it may be your best option, they are at least worth taking a look at.
In addition to starting a real estate LLC, real up-and-coming real estate investors may also consider affordable liability insurance. If for nothing else, the amount of money and work required to maintain an LLC isn’t always necessary. The potential threat of a lawsuit may be mitigated with the right liability insurance. That said, there are risks with depending on liability insurance as your sole means of legal protection. When all is said and done, it is possible to get by as a real estate investors with liability insurance, but you will be susceptible to more risk exposure. Liability policies often have limits and exceptions, which can make the prospect of investing more risky. Consequently, LLCs do provide more protection, which begs the question: Should I start an LLC for real estate investing? Simply put: yes. While not necessary, LLCs tend to award their holders with more protection, which can simultaneously mitigate risk and increase profit margins.
As Investopedia so eloquently puts it LLCs are a “corporate structure whereby the members of the company cannot be held personally liable for the company’s debts or liabilities. Limited liability companies are essentially hybrid entities that combine the characteristics of a corporation and a partnership or sole proprietorship.”
Let’s take a closer look at some of the most important reasons real estate investors intent on starting their own business should—at the very least—consider starting a real estate investment LLC.
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Starting a real estate LLC is most likely in the best interest of real estate investors who are looking to make a career out of investing. If for nothing else, LLCs are not necessary, but highly recommended. Here are some of the most important reasons investors should consider getting an LLC:
Reduce personal liability insurance
Gain general LLC benefits
There is one reason — perhaps more so than any other—for real estate investors to consider structuring their business under an LLC: these nifty little business structures limit personal liability. If for nothing else, LLCs offer patrons the unique ability to separate their personal assets from their business assets — a safety net that can’t be underestimated. The owner’s risk exposure is essentially limited by the protection awarded by the LLC. Let me explain.
Consider a situation in which an investor is intent on earning passive income through the prospect of becoming a landlord. In doing so, they buy a rental property and introduce a tenant as soon as they can, because that’s what you do as a landlord. It’s entirely possible everything goes according to plan, and the investor doesn’t experience any setbacks, but we all know that’s not always the case. In the unfortunate event that said tenant is injured on the property because of unsafe conditions, today’s legal climate would make it rather easy for them to pursue a lawsuit against the individual that owns the property.
It’s worth noting that if the subject property were owned individually by the investor in this scenario, he or she would be named on the lawsuit brought against them by the injured tenant. As a result, the landlord would be forced to defend their personal assets because they were none other than the owner of the property in which the injury occurred. But what if I told you the property didn’t have to be owned by an individual, but rather an individual company could assume the responsibility?
Coincidently, that’s not far from how LLCs operate. “If that property were owned by an LLC, the owner’s risk exposure would be insulated by the protection of the company, leaving only the assets owned by the LLC (as opposed to all of the owner’s personal assets) exposed to potential lawsuits,” according to Legalzoom.
If the prospect of insulating your personal assets from malicious lawsuits wasn’t enough to make you consider starting a real estate investment LLC, consider this: LLCs award owners unique tax benefits that can rival even those that limit personal liability. Otherwise known as pass-through taxation, this particular benefit of starting a real estate investment LLC allows real estate investors to partake in the obvious liability shield while simultaneously avoiding being taxed on two fronts; it’s actually quite amazing. Let me explain.
The Internal Revenue Service (IRS) has made a point of classifying real estate holding companies — owned by a single individual — in the same way they would a sole proprietorship: as a “disregarded entity.” Consequently, both income and capital gains brought in from the LLC “pass through” to the owner. It’s also worth noting that the owner only has to pay taxes as an individual — all while enjoying the benefits of the same limited liability I discussed in the first part of this article. And therein lies one of the most important advantages of starting a real estate investment LLC.
Though inherently different, multimember LLCs can partake in the same benefits of pass-through taxation, but not without some subtle differences. Consult a tax professional for more information pertaining to pass-through taxation rules and regulations for multimeter LLCs.
Outside of pass-through taxation and personal liability insurance, forming an LLC awards investors with several more benefits and conveniences. While they may not be entirely unique to forming an LLC, those who form an LLC for their real estate company could enjoy the following benefits:
Streamline Management: While corporations and partnerships are governed by strict management rules, LLCs enjoy a more flexible management system. Instead of requiring officers and directors, LLCs may be managed by its owners without any messy requirements.
Discounts In Several States: Some states may have lower state registration and maintenance fees for LLCs than their corporation counterparts.
Profit Distribution Flexibility: LLCs are granted more freedom in the way they distribute their profits between owners.
Transfer Of Ownership Can an LLC buy investment property? The answer is not only yes, but it can also gift it. LLCs grant their owners to transfer the ownership of real estate assets to heirs in the form of a gift.
Starting a real estate investment LLC is a great option for any investor. Not only will the legal entity protect your personal assets, but it coincides with great tax benefits not made available to everyone else. If you are wondering whether or not starting a real estate LLC is in your future, don’t take the benefits they offer lightly; they could be the best thing to ever happen to your business.