The acronym “LLC” stands for limited liability company, which is a private limited company structure specific to the United States. Property investors form a limited liability company, or LLC, not just to minimize their personal liabilities, but also to imply a more professional reputation.
What is an LLC in real estate?
An LLC is a type of U.S. business entity that’s separate from an individual or company. In real estate, a business owner forms an LLC for the sole purpose of real estate investments.
As the name suggests, an LLC reduces an individual’s legal liabilities. In most cases, an LLC protects owners from personal accountability if they encounter lawsuits. Legal troubles involving real estate shouldn’t affect their personal assets.
What are the advantages of a real estate LLC?
Real estate LLCs allow business owners to buy, lease and/or sell properties. Aside from legal protection, an LLC also incurs tax benefits for owners.
For example, LLC owners are safe from double taxation by the Internal Revenue Service (IRS). Business owners don’t need to pay corporate taxes for any income derived from property transactions of an LLC.
Real estate investors may also enjoy a 20% cut on business income taxes if they form an LLC to manage rental properties.
What are the disadvantages of a real estate LLC?
Real estate LLCs won’t protect sole proprietors from personal liability. In other words, an individual’s personal assets may be in trouble when they encounter financial or legal problems.
LLC owners also pay several fees in exchange for tax breaks and reduced legal liabilities. Some of these expenses include filing fees and annual fees to maintain their LLC status.
In California, for example, the annual fee for an LLC costs US $820. Other states such as Ohio and South Carolina don’t impose annual fees. Instead, LLC owners pay recurrent fees (e.g. business license) to maintain their operations.
Who owns the property in an LLC?
An LLC owns the real estate assets listed under its name, which always appears on public records.
The anonymity of members is one reason why high net-worth individuals and celebrities form LLCs to buy or sell real estate.
How do I form a real estate LLC?
Property investors may establish an LLC in any state in the U.S. The process begins with a thorough review of the state’s regulations.
Next, the owner must verify that their chosen business name doesn’t exist yet. Choose a registered agent who lives in the state where you plan to operate an LLC.
Individual LLC owners may designate themselves as registered agents, but this means extra paperwork.
Registered agents handle the legal paperwork of LLCs, including the Articles of Organization and Operating Agreement.
As soon as the legal documents are complete, the owners must acquire business permits and licenses. LLC owners may also need an employer identification number or a tax identification number from the IRS.
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