Protecting Personal Wealth: The Importance of LLCs for Real Estate Investors

There's more than one way to invest in real estate; some options are better than others when it comes to limiting risk. If you want to create a portfolio of investment properties and limit your personal risk exposure, one option to consider is forming a Limited Liability Company or LLC.

The LLC is one of the most popular legal structures in the country. It's been around since the 1970s, and while it's used across various industries, it was initially created with real estate investors in mind. Learn more about the benefits of forming a real estate LLC and the steps required.

What is a Real Estate LLC?

The critical thing to know about an LLC is that it establishes a distinct legal entity. In other words, the LLC is considered to have its own legal "life," independent of the investor or investors who formed it.

When you set up a real estate LLC, you're setting up a distinct business entity that will allow you to buy, sell, and rent real estate, separate from yourself as an individual. The upshot is that should anything go wrong (for example, a lawsuit pops up), you won't be held personally responsible for it. Instead, the business will be held accountable.

Make no mistake: When your real estate LLC is sued, it's never fun. But being able to keep your personal or family assets off the table completely is important legal protection. It may also help you invest with greater confidence and peace of mind.

There are plenty of other benefits, as well, such as the ability to bring in multiple investors, allowing you to participate in real estate deals with a wide range of people under the auspices of your LLC. However, personal wealth protection is the most significant and common reason investors register real estate LLCs.

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What are the Other Options for Real Estate Investment?

The LLC format isn't the only legal option for launching a real estate investment. You can also invest by forming a Corporation or maintaining a Sole Proprietorship. However, these options have some significant downsides, making them less advantageous than the LLC format. Consider:

Real Estate Corporations

Not only are Corporations bound by rigid regulations, but they also force double taxation: You'll pay the corporate tax rate and pay taxes on your share of the profits. By contrast, a real estate LLC allows for pass-through taxation, considerably lessening your tax burden.

Real Estate Sole Proprietorships

Forming a Sole Proprietorship is incredibly easy; you don't have to file any paperwork. But while that might sound appealing, it's critical to remember that Sole Proprietorships don't offer much personal liability protection. As such, you will face a higher level of risk exposure.

How to Register a Real Estate LLC

The process for registering an LLC can vary depending on the state you're in, but it usually unfolds this way.

Register in the Right State

Rule of thumb: Register your LLC wherever you're making money. For real estate investors, that means registering in the state where you're investing. For example, if you're investing in properties in Miami, you'll want to be forming an LLC in Florida. And if you're investing in properties in multiple states, you'll likely need to register in each.

Choose the Right Name

Be sure you select the right name for your LLC. This is primarily a legal consideration, so your name will only matter from a marketing/branding perspective. However, selecting a name that still needs to be used by another LLC in your state is essential. There should be a searchable directory you can use to confirm the name you want is acceptable.

Pick a Registered Agent

Every LLC is required by law to have a Registered Agent. This can be an individual or an organization whose responsibility is to receive legal documents, including documents from the state, on the business's behalf. It is advisable to hire a third-party Registered Agent service, which can cost under $100 annually.

Ready to find your dream home in Colorado?
Let us help you. Call or Text Kenna Real Estate at 303-955-4220 to get personalized assistance from our expert real estate agents. Find out what your home is worth in today's market.

Create an Operating Agreement

An Operating Agreement is a blueprint for running your new business venture. If you're investing with partners, this document will articulate your division of labor and profit allocation structure. It can help minimize legal disputes down the road.

File Articles of Organization

This is the document you must file with the state formally establishing your new real estate business. When you file, you will also need to pay a registration fee. The amount varies from state to state, ranging from $20 to over $200.

Claim an Employer Identification Number

Your EIN is like a Social Security Number for a business entity. You'll need it before you can file your taxes. The IRS provides this number for free.

Establish an LLC for Your Real Estate Investments

Any time you invest in real estate, you naturally invite some risk. One of the best ways to mediate that risk is to invest not as an individual but as an LLC entity. Consider registering your own real estate LLC today.

Author Bio

Amanda E. Clark is a contributing writer to LLC University. She has appeared as a subject matter expert on panels about digital marketing and small business ownership.

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