An LLC is a smart choice for a real estate business. It protects your personal assets from business debts and lawsuits and avoids corporate double taxation.
If you want to invest in real estate, you might think about forming a limited liability company (LLC). A real estate LLC keeps your personal assets separate from the property, but you still control the profits. This guide explains the pros and cons of an LLC for real estate and how to set one up. When you’re ready, connect with our business experts using our LLC formation services to start your real estate investment LLC.
Creating an LLC for real estate means forming a legal business entity for your real estate business. As a separate entity, the LLC can buy, sell, and rent out property under the business name. Personal assets are kept separate from business assets to protect the business owner from personal liabilities. Plus, the LLC is great for real estate investing because you can share ownership with other real estate investors.
Both an LLC and a corporation offer liability protection, but they’re taxed differently.
Since LLCs use pass-through taxation by default, the business won’t pay income taxes at the entity level. Instead, the company passes the profits or losses to you as the owner to report on your individual tax return. Pass-through taxation could be a tax advantage.
On the other hand, corporations use double taxation. The company pays corporate taxes on its profits, and you pay the individual tax rate on your share of the income. If you elect S-corp taxation, you have pass-through taxation like an LLC.
Forming an LLC for real estate investing means you get personal liability protection. But you must complete some business formalities like paying a filing fee and, in some states, filing annual or biennial reports and paying associated filing fees.
As a sole proprietor, you have an alternate option. As a default business structure, the sole proprietorship has no formalities or expenses to establish. However, you don’t receive limited liability protection. If you run into trouble, your personal assets could be used to fulfill business obligations. That is, if someone sues the business, they could take your personal savings, house, etc.
Forming a real estate LLC has great benefits. One of the biggest benefits of owning an LLC in real estate is limited liability for business debts for the owner. More benefits include having more choices as to how the business is taxed. By default, you’ll have pass-through taxation. LLCs are also regarded as more legitimate than sole proprietorships and general partnerships.
The LLC is a popular business structure for real estate companies because it provides personal liability protection for the owners. If there’s an accident on your property, the average liability insurance policy will cover some of the costs. When the LLC owns the property, the injured party must sue the business and usually can’t access your personal assets. Additionally, if you run into problems making mortgage payments, your assets can’t be used to satisfy the debt.
Unlike a corporation, a limited liability company has pass-through taxation. The profits from the business will only be taxed once, on the owner’s personal tax return. They won’t first be taxed at the business level. An LLC also gives you the option of filing as an S corporation, which could allow you to save on self-employment taxes, or a C corporation, which has the widest range of deductions. A tax professional can help you determine if either of those options would benefit you.
One of the pros and cons of an LLC for the real estate agent is professionalism and business credibility. When the LLC applies to be a property owner, it may have access to better loan terms than individuals. Also, legal entities like LLCs and corporations often appear more professional to mortgage lenders, tenants, and other real estate investors. To a potential tenant, “Jones Real Estate Holdings LLC” may sound more reliable than “Justin Jones,” the sole proprietor.
Most real estate investors form their businesses in the state where they live or plan to buy property. That’s the simplest approach for the average person. However, some people form their LLCs in tax-friendly states like Delaware, Wyoming, or Nevada. If you go this route, consult a professional about the state’s business laws and business licenses.
Creating an LLC for your real estate investment business makes adding new owners or transferring the property easier.
To sell the LLC real estate, you can sell the LLC by transferring the membership interest to the new owners. The LLC continues to own the property, while the new members now control it. You don’t have to go through a real estate transaction and avoid a break in ownership.
With an LLC, it’s simple to include more real estate investors as owners. Adding a new member is as simple as amending the operating agreement and your Articles of Organization. Otherwise, you’d have to go through the time-consuming process of changing the deed and mortgage documents.
Recommended: What are the Benefits of an LLC?
While forming a real estate LLC has a large assortment of benefits, there are some drawbacks. One of the biggest mistakes people make when starting a real estate business is buying property in their own name. Once you get into the business of buying real estate, you’ll have to transfer the property to the LLC. This can cause you some significant legal issues.
Depending on your mortgage terms, the outstanding balance could become payable immediately when you transfer ownership.
A “due on sale” clause is a mortgage term that’s triggered if you sell the property. The mortgage balance becomes immediately due when the ownership changes in a sale or transfer. To avoid this, you have to request a waiver from your lender before transferring the property.
Transferring property to the LLC might mean you owe transfer taxes, but it depends on your state. For example, Delaware has laws that eliminate the transfer tax if transferring the ownership 100% from an individual owner to the business. Other states (like Pennsylvania) tax transfers regardless. Be sure to check your state’s rules before moving forward.
Now that you know the pros and cons of a real estate LLC, let’s help you form one. We’ll give an overview of the steps below. You can also easily access our formation services with our guide on how to form a rental property LLC.
Before you can register your LLC, you’ll need a business name. The right business name gives your customers a preview of your services and values. Once you have some candidates in mind, search to see if another business already uses your name. Search online, on social media, and with your local business registration.
The process of selecting a name for your business is an excellent opportunity to use your imagination. But you should know that each state has different rules for company names. Most states require LLCs to include “Limited Liability Company,” “LLC,” or a similar designator in their names. Be sure you check the name requirements for your state.
To keep your business in compliance, you need a reliable registered agent. If there’s an accident on your property, the injured party will likely notify your registered agent of a lawsuit. Your registered agent also forwards official business notices from the state to you. When you use our registered agent service, we can connect you with a credible registered agent.
Once you’re ready, head to your Secretary of State or Division of Corporations to form your LLC. In most states, that means filing your Articles of Organization (also known as a Certificate of Formation or Certificate of Organization in some states). You’ll need to decide to register as a broker or investor, which determines the business license you’ll need. After registering your business name, it’s a good idea to claim your domain name so you can reach your customers online.
Some states require an LLC to have an operating agreement, but it’s a good idea to have one regardless. With your operating agreement, you decide how:
Drafting an operating agreement at the start helps prevent future disputes and questions. Get started on yours with our LLC operating agreement template.
Your Employer Identification Number (EIN) identifies your business for tax purposes. You’ll need one to issue employee paychecks and remit wage withholding. Even if you don’t have employees, you likely need an EIN to open a business bank account. You can file the paperwork yourself with the IRS or let us secure one for you with our EIN Service.
Forming an LLC for your real estate business can give you peace of mind and security. You’ll be much better protected from legal action than if you operated as a sole proprietor. In addition, you’ll save money on taxes compared to an S-Corp or a C-Corp.
When you form your real estate LLC with us, you’ll get access to our team of business experts. We’ll walk you through every step of business ownership and compliance. Try our Amendment Filing Service to keep your business up-to-date. Or enroll in our Worry-Free Compliance Service to stay organized and keep up with compliance requirements.
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What is the best state to form a real estate LLC?
When it comes to forming your real estate LLC, the best state is where you can keep up with the legal requirements. Many LLC owners file in the state where they live or buy property. If you choose a different state, be sure to consult a professional to help you learn the rules.
Should a real estate agent have an LLC?
An LLC is an excellent choice for a real estate agent. While you must complete the legal formalities, forming an LLC helps protect you from personal liability. If something goes wrong with a sale, the damaged party must sue the business but usually can’t touch your personal assets.
Can you buy real estate with an LLC?
Yes. You’ll apply for a mortgage using the LLC’s name and credentials. The deed will be in the LLC’s name when you buy the property.
Can a dissolved LLC transfer real estate?
Yes, with limitations. When you dissolve an LLC, the next step is winding up the business. Winding up involves liquidating the LLC’s assets, meaning you may transfer ownership of the real estate. However, the proceeds must go to pay off creditors and, if any remains, to the owners.
Do you have to live in the same state as your real estate LLC?
No, you can form your real estate LLC in any state you want. If you don’t know that state’s business laws, talk to a professional to make sure you understand the necessary rules.
How much does it cost to set up a real estate LLC?
The cost to form an LLC for a real estate business depends on your state. Fees can range from $50 to $500 (but some states have waived fees during the COVID-19 pandemic). Visit our guide to LLC costs and filing fees to find the cost for your state.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
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