Free Guide To Starting A Real Estate LLC In 2024

An LLC is formed by filing articles of organization with the state and obtaining an investor agreement for real estate transactions. This agreement outlines the company’s structure and governance, such as the ownership and management responsibilities of each member. Members of an LLC are referred to as “owners” and are not personally responsible for the company’s debts or liabilities. Instead, the company’s assets are used to pay off any debts, meaning that members’ personal assets, such as their homes and bank accounts, are protected.

In terms of taxes, real estate LLCs offer a lot of flexibility. The owners of an LLC can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on their specific tax needs and circumstances. This flexibility allows owners to structure the company in a way that best fits their individual needs, and helps to minimize their tax liabilities.

What Is a Real Estate LLC?

A real estate LLC, also known as a limited liability company, is a type of company structure that combines the flexibility and tax benefits of a partnership with the liability protection of a corporation. This structure is popular among real estate companies, developers, and property managers because it helps to limit their personal liability and protect their personal assets in case of any lawsuits or financial obligations related to their real estate holdings.

Additionally, real estate LLCs provide owners with a level of privacy and confidentiality. The owners’ names and addresses are not listed in public records, unlike corporations, where the names of directors and officers are publicly available. This confidentiality can be an important factor for real estate investors who prefer to keep their business dealings private. 

Contact your secretary of state or your state’s small business administration’s office for information on filing for LLC, S Corporations, or C Corporations.

Read More: Best LLC Formation Services 2024

Real Estate LLC: Pros & Cons

While the property is a good investment, these purchases can expose real estate investors to risks. A real estate LLC offers several benefits, including liability protection, tax flexibility, reduced risks of double taxation, relief from corporate taxes, qualified business income, rental income, tax breaks, confidentiality, and protection of personal assets. With an LLC only the LLC’s assets are at risk from legal action, the real estate investor is protected from double taxation. It combines the benefits of a partnership and a corporation, allowing property investors to structure their business in a way that best fits their individual needs and minimize tax liabilities. An LLC also provides privacy, as the owners’ names and addresses are not publicly available in the records. Overall, a real estate LLC can be a valuable tool for real estate business investors looking to safeguard their personal and financial interests.

Pros

Personal Liability Protection

The personal liability protection of an LLC is one of the main benefits of this structure. An LLC provides limited liability protection to its owners, also known as members, meaning their personal assets are protected from being used to pay off business debts and liabilities. This is a crucial factor in reducing the risk of personal financial loss for the real estate investment LLC, making an LLC an attractive option for many.

Reduces Taxes

A real estate LLC can reduce taxes by allowing for pass-through taxation, where the profits and losses of the business are passed through to the members and reported on their personal tax returns. This can result in lower overall tax liabilities as compared to other business structures, as well as potential tax benefits such as deductions for business expenses. It’s important to consult with a tax professional to fully understand the tax implications of a real estate LLC and to ensure that you are taking advantage of all available tax benefits.

Simple Transfers

A real estate LLC can simplify transfers by allowing for easy transfer of ownership interests among members, without affecting the operations of the business or requiring the transfer of the underlying property. This flexibility makes it easier to manage ownership interests and can simplify the process of transferring ownership in the event of a sale or other change of ownership. An LLC also makes it easier to add or remove members, allowing for greater flexibility in the management and ownership of the business.

Cons

There are some drawbacks to setting up a property business, including increased administrative and compliance requirements, as well as the possibility of additional costs associated with forming and maintaining the LLC. There may also be limitations on the types of investments that can be made, as well as restrictions on the transfer of ownership and profits. Additionally, there may be limits on the ability to secure financing and raise capital, as lenders and investors may be less familiar with LLCs compared to other business structures. These factors should be carefully considered before deciding to set up a real estate LLC.

The Due on Sale Clause

A due-on-sale clause is a provision in a mortgage or loan agreement that requires the borrower to pay off the full outstanding balance if they transfer ownership of the property. This means that if the property is sold, the new owner must either assume the existing mortgage or pay it off in full. Due-on-sale clauses are intended to protect the lender’s interest in the property and ensure that they are able to collect the full amount owed in the event of a sale.

Increases Costs

A real estate LLC can increase costs as compared to other business structures due to the added administrative and compliance requirements, such as filing articles of organization, obtaining an agreement for a real estate investment LLC, and obtaining necessary licenses and permits. Additionally, there may be fees for registering with the state, obtaining business liability insurance, and maintaining the LLC over time. These costs should be taken into consideration when deciding whether a real estate LLC is the right choice for your investment goals and circumstances.

Forming an LLC for Your Real Estate Business

Forming a real estate LLC involves several steps, including selecting a name and conducting a name availability search, filing articles of organization with the state, obtaining an agreement for a real estate investment LLC, and obtaining any necessary licenses and permits. It’s also important to obtain proper liability insurance and to keep accurate records of all financial transactions. It may be helpful to seek the advice of a business attorney or tax professional to ensure the formation process is completed correctly and in compliance with all applicable laws and regulations.

Choose a Name for Your LLC

Your business name should be unique and will need a corporate designation such as Incorporated (Inc.) or Corporation (Co.). Do not use restricted words, trademarked words, or phrases as these are not allowed. Then, register your DBA. DBA stands for Doing Business As; this is necessary because you will be collecting money, fees, etc., under a name that is different from your legal name. 

Choose Your Registered Agent

Next, you will choose your registered agent. This can be the LLC owner, a partner, or even an employee. The registered agent acts as the official representative for the business, ensures all paperwork is properly filed, and the registered agent’s address is the official address for the business. 

Read More: Best Registered Agent Services 2024

File Articles of Organization

Next, you’ll file Articles of Organization. These are the legal documents that are filed with the state to officially form a limited liability company (LLC). They outline the basic information about the LLC, such as its name, purpose, and ownership structure. The articles of organization are a crucial step in the formation of an LLC, as they establish the company as a separate legal entity and provide the basis for its governance.

Create an LLC Operating Agreement

Next, you’ll create the LLC agreement. An LLC operating agreement is a legal document that outlines the internal management and financial structure of an investment property, rental property, lease property, or property owned by an LLC. It details the property owner or property owners, management, separates their personal property and financial responsibilities of each member, as well as the rules for decision-making and dispute resolution. The operating agreement serves as a blueprint for the LLC’s operations and is an essential component in the formation and management of an LLC.

Follow Other State/Federal Requirements

Finally, you will contact your Secretary of State office, business office, tax and revenue offices, the Internal Revenue Service,  and economic development offices to ensure your business has all paperwork to be filed. 

The Top 2 Limited Liability Company Services

Northwest Registered Agent

Northwest Registered Agent is primarily a Registered Agent Service but their suite of tools does offer additional business services at a reasonable price. The main difference between Northwest and similar entities is that Northwest only offers one paid plan for services. The initial cost is $39 to file the LLC paperwork; all other charges are due as per your state’s regulations. There is a separate option, called Pay In Full. With this option, which costs $225, Northwest will file the LLC, and provide agent services for one year, however, all other charges from state fees, etc., will still apply. As a registered agent, they submit paperwork filings such as an amendment to the operating agreement or name change, certificate handling, annual report filing, and other official business with the secretary of state.

Northwest will scan up to five regular documents each year for free; after the initial five, there is a charge for additional services. This is also different from other providers as many will only scan and send legal/official documents. 

Northwest also has a strict no-data-selling policy and will provide pricing changes in advance. Northwest also offers the ability to pay by the month, with an auto-renew option. 

ZenBusiness

ZenBusiness was founded in 2017, and bills itself as a one-stop shop for small business preparation. The platform helps small businesses launch, operate, and grow the business, and includes access to many services that simplify the set-up and launch process, and it is automated, which means the owner can quickly and efficiently file needed paperwork. As a registered agent, they submit paperwork filing, annual report filing, an amendment to the operating agreement, certificate handling, and other official business with the secretary of state. 

Through Zenbusiness you can search for available business names, create articles of incorporation, find out the needed documentation for your state and federal filings and registrations, obtain an EIN, build the business’ web presence through domain names, email, and domain privacy protection. 

LLC For Real Estate Investors: Why & Why Not?

There are several real estate LLC benefits. A real estate LLC can be a good option for real estate investors who are looking to protect their personal assets and minimize tax liabilities. The LLC structure provides protection to only the LLC and its members and provides tax flexibility, and confidentiality, which can be valuable for the real estate investment LLC. However, it’s important to carefully consider the potential drawbacks, such as increased administrative requirements and the possibility of additional costs, before making a decision. It may also be helpful to consult with a business attorney or tax professional to determine if a real estate LLC is the right choice for your investment goals and circumstances.

Final Thoughts

A real estate LLC is a useful business structure for real estate investment LLCs, developers, and property managers. It provides protection for personal taxes, tax flexibility, and confidentiality, making it an attractive option for those looking to protect their personal assets and minimize their tax liabilities.

Frequently Asked Questions (FAQs)