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Real Estate LLC Benefits: Breaking Down The Advantages

What substantial real estate LLC benefits can investors obtain from incorporating their business? Better yet, how will they enhance the long-term outlook of their business?

One of the first questions an up-and-coming real estate investor needs to answer is the type of corporate structure they want to establish. If for nothing else, starting a real estate investment LLC is as important of a task as any. Choosing a business formation is important for many reasons, but most importantly, it dictates how your business will pay taxes, the type of regulations you’ll be subjected to, as well as your personal liability. The legal structure of a limited liability company (LLC), which combines the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership, will generally align best with the needs of investors. Real estate LLC benefits include shielding investors from any potential liability associated with the business, including their personal assets, as well as enabling them to obtain significant tax savings, and so much more.

Forming a real estate LLC offers a world of advantages in comparison to other corporate structures. The following breaks down the top real estate LLC benefits for investors:

Breaking Down The Real Estate LLC Benefits For Investors

Forming a real estate LLC

Protection Of Assets

The strength of a real estate LLC is its ability to protect investors, including their personal assets, from liability. The power of protection from personal liability for business actions is paramount as an investor. This corporate structure enables business owners to be considered a separate legal entity from their company, ensuring they are not personally liable in case of debt or lawsuit from the business.

For example, if an LLC business failed to pay its debt or was sued, a creditor could only legally hold your company liable — not you personally. As a result, this protects investors from having creditors seize their personal belongings such as their house, cars or other assets. On the flip side, the LLC business is held accountable, which means money invested into the business would be liable to debt and lawsuits.

Although several real estate LLC benefits exist, it’s also important to remember there are no foolproof methods of protection in real estate. And there are, of course, exceptions to limited liability. According to Nolo.com, a publisher of self-help legal books and software, an LLC owner can be held personally liable if he or she:

  • Personally and directly injures someone.
  • Personally guarantees a bank loan or a business debt on which the LLC defaults.
  • Fails to deposit taxes withheld from employees’ wages.
  • Intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else, or treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.
  • Before getting underway with the real estate LLC benefits, investors are recommended to speak with a tax and legal professional.

Asset protection is one of the more notable real estate LLC benefits an investor can gain. This corporate shield is crucial to growing and succeeding as a real estate investor, especially when it comes to buying and selling real estate.

Pass-Through Taxation

Another real estate LLC benefit is in the form of pass-through taxation. The formation of a real estate LLC enables businesses to avoid being taxed directly, with investors reporting the company’s profits or losses on their personal tax returns. In most cases, this will result in a lower rate for business owners, as well as the avoidance of double taxation. However, investors do have options on how they want to be taxed. Here are three general options:

  • Single Member LLC: The LLC business is not taxed; The member is taxed through their personal federal tax return.
  • Partners LLC: Members elect to be taxed as a traditional partnership.
  • Corporation LLC: Members elect to be taxed as a corporation.

Done correctly, real estate LLC benefits can also include thousands of dollars’ worth of annual tax savings.

Builds Credit For Your Business

One of the more underrated real estate LLC benefits is the ability to build credit for your business. When an investor determines an LLC is the right corporate structure for them and their business, they can obtain an Employer Identification Number (EIN). This essentially allows for your business to build credit — without using or impacting your personal credit. It can be an excellent tool for investors, as it enables you to build a dominant credit rating for your business, including the ability to qualify for credit lines under your business name. In essence, this could provide double the borrowing power for investors, with both personal and business credit profiles.

Easy To Register

Establishing a real estate LLC is one of the easier things an investor can do. Not only is it simple and fast, almost anyone can do it. According to SBA.gov, there are four general rules that need to be followed:

1. Choose A Business Name: This name must be different from an existing LLC in your state. Also, it cannot include words restricted by your state (such as “bank” and “insurance”).

2. File The Articles Of Organization: This document seeks to validate your LLC. In most cases, it will include information such as your company’s business name, address, and the names of other members in your LLC. It will also be filed with the Secretary of State, although certain states may require you to file with other departments.

3. Create An Operating Agreement: While the majority of states do not require an operating agreement, this contract is generally recommended for LLC companies with multiple members. This document will essentially outline the rules and regulations of your company’s business, including member’s rights and responsibilities, as well as percentages of interests and sharing of profits and losses.

4. Obtain Licenses & Permits: The last component of legally starting a real estate LLC, once your business is registered, is to obtain business licenses and permits. In addition, some states may even require companies to announce their business by publishing a statement in the local newspaper, according to the SBA.gov.

The Bottom Line

From a corporate structure perspective, real estate LLC benefits are second to none. Along with the simplicity of setting up a limited liability company (it’s fast, simple and can be done by almost anyone), a real estate LLC offers significant benefits to investors in the form of personal protection and tax savings. Additionally, it provides a layer of professionalism that other investors won’t have. That said, establishing a real estate LLC is an important step for investors to not only achieve success, but ensure they’re protected as well.

 

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