Perhaps the most common question we receive is: Should I set up an LLC for my real estate business or my rental properties? LLC sounds so complicated, so is it necessary or worth the effort, even with one property?
LLC’s are highly misunderstood because what works for one person may not work for you, and what works for you may not work for another person. But, if you are thinking of growing your real estate portfolio, whether you have one property or 10, you must treat that portfolio more like a business and more minor of a hobby.
WHAT IS AN LLC AND WHY THEY ARE POPULAR
A Limited Liability Corporation (LLC) is a legal structure that provides the limited liability structure of a corporation and the tax efficiencies and the operational flexibilities of a partnership. Stay with us!
This overly complicated definition means that an LLC has three significant benefits; Tax efficiency, Operational Flexibility, and Limited Liability.
An LLC is reasonably easy to handle during tax time, especially if it’s a single-member LLC (Sole ownership or Joint Ownership)
Because LLCs are pass-through entities, the income and expenses that flow through the LLC are reported and paid by each member on their income statement. There is no corporate tax that you will be expected to pay, making taxes not only easier but less expensive.A single-member LLC does not require its business tax return; a Multi-member LLC with partners will! So please be careful – the LLC decision has complicated legal and tax implications and that you should speak to an attorney and CPA to fully understand what is best for you.
LLCs are relatively inexpensive and flexible to set up and operate depending on your geographic location. If you own an LLC and should be sued, the LLC is the owner being sued, and any liabilities or damage to your wallet contained within the LLC and not everything you own. Therefore, if you should lose a lawsuit, creditors will not be able to penetrate your other assets to recover damages. So, ensure your LLC is set up correctly, not to be easily penetrated by a court. In some instances, this is the fear that encourages investors to want an LLC.
But wait a minute before you go running to get an LLC! It is not a get-out-of-jail-free card. If you plan to use a loan to acquire an investment property, it will be unlikely that you will have an LLC on that property as most residential lenders will not lend on property inside an LLC. But if protecting your rental property is crucial to you, you can consider options such as property insurance policies, no matter how small.
GO WITH WHAT WORKS BEST FOR YOU
Remember, what works for some may not work for others, so carefully consider if LLCs are great for you and your best option when opening the conversation of protecting your wealth and assets. LLCs can be valuable, and it is highly recommended that you speak with your attorney before setting one up. Your attorney will be able to suggest your best options, depending on the number of assets you are holding, and sometimes an LLC may not be their first recommendation.