LLC for a Real Estate Business

What Is a Real Estate LLC and When Should I Form One?

A real estate LLC is a formal business entity that protects the personal liability of its owner(s) in case the business is sued. There are a few different ways these businesses can function. You can either use one LLC for all of your properties, create separate LLCs for each one, or form a series LLC (where permissible) to maintain separate LLC segments under one umbrella company.

It’s important to form your real estate LLC before your company ever begins the process of transacting business, because if you start conducting business before forming your LLC, your early transactions may not be covered by the LLC’s “corporate veil,” which is the layer of protection between your business assets and your personal assets.

Additionally, it’s often simpler to complete real estate transactions through an already-existing LLC than it is to transfer them later. This is another reason to form your LLC before you ever start acquiring real estate, as it is typically much harder to transfer ownership of a property from a sole proprietorship or a general partnership to an LLC because a lender will likely have to consent to that transfer. It’s not that this is particularly difficult, but it’s one more easily avoided hoop to jump through.

Why Is the LLC the Right Choice for a Real Estate Business?

Personal Asset Protection

As we already mentioned briefly, the LLC protects your personal assets. If you own rental properties, for example, this protection could make a massive difference. Let’s say that you have a rental property with a rooftop balcony, and your tenant falls off of that balcony. It’s not unlikely at all that this individual would choose to sue your business for not providing a safe environment.

If you have an LLC, that tenant can only sue you for your business assets. However, if you simply own the property as a sole proprietor, the tenant can also sue you for your own personal assets, like your home, car, personal bank accounts, etc.

Taxation

Another major advantage of the LLC for a real estate business is the flexible taxation awarded to LLCs. The default method of taxation for an LLC mimics the way a sole proprietorship or general partnership is taxed, and it helps its owner(s) avoid the “double taxation” paid by most corporations. (Double taxation is when the corporation itself pays taxes on the corporate level, and then the shareholders also pay taxes on their dividends, thus taxing the same money twice.)

With the pass-through method used by most real estate LLCs, there is no corporate-level tax, as taxes are only paid by the LLC’s owners on their personal returns. In addition, the Internal Revenue Service allows real estate LLCs to deduct rental property mortgages and loans taken out for the purpose of property improvements as business expenses, which can also save owners a considerable amount of money.

Series LLC

We also appreciate the ability to form separate LLCs for each property, or to form a series LLC with separate segments for different properties (series LLCs are only recognized in certain states, so check with your state to make sure this is an option). This allows you to insulate each property in your portfolio from the others from a liability standpoint, which allows you to minimize risk in case there’s a lawsuit involving one individual property.

Easy Ownership Transfers

Finally, it’s often simpler to complete real estate transactions through an already-existing LLC than it is to transfer them later. This is another reason to form your LLC before you ever start acquiring real estate, as it is typically much harder to transfer ownership of a property from a sole proprietorship or a general partnership to an LLC.

Enhanced Credibility and Name Uniqueness

Finally, an LLC structure can enhance the credibility of your real estate business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you’re a realtor, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for a real estate business.

In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another realtor wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.

With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.

How to Form a Real Estate LLC

Forming an LLC for real estate is a similar process to forming an LLC for any other purpose, but it’s still worthwhile to briefly cover the steps involved. Remember that if you want a more in-depth look at the entire process, you can check out our comprehensive “How to Form an LLC” article.

1) Choose a Business Name

The first step to form a real estate LLC is to choose a name for your business. As an LLC owner, you have the exclusive rights to your business name, as long as you choose a name that is not already in use in your state. Keep in mind that you’ll need to include either the phrase “limited liability company” or the letters “LLC” in your business name.

2) Designate a Registered Agent

Next, you should designate a registered agent. This is a person or business entity that takes on the role of accepting document deliveries from the state on behalf of your business. Every time the registered agent receives a delivery, they will notify you, then forward it to you. This ensures that you never miss any important deliveries like service of process and that the state always has a reliable point of contact for your business.

3) File Your Formation Documents

The third step is to compose a document usually called the Articles of Organization, which is the form filed with the state to officially form your real estate LLC. This is a relatively uncomplicated document that provides the name and address of your LLC, the location and identity of your registered agent, the names of your LLC owners, and the fact that you will use this LLC to pursue real estate business activities.

4) Acquire an EIN

You will also need to acquire a federal tax ID number (also known as an EIN — Employer Identification Number). This is essentially a Social Security Number for your real estate business, and it allows you to hire employees, open business bank accounts, file taxes, and more.

5) Create an Operating Agreement

You should then draft an operating agreement, which is an internal document that describes how your business will function. This is not legally required in most states, but it’s still vitally important because it can help prevent member disputes down the line.

6) Open a Business Bank Account

Another crucial step is to open a business bank account, which will help you keep your personal and business finances separate. This is one of the most important aspects of maintaining your corporate veil, and if you fail to keep your finances strictly separated, you run the risk of losing your personal asset protection.

7) Obtain Licenses and Permits

Finally, you’ll need to acquire any relevant permits and licenses to operate in compliance with local, state, and national laws. Most jurisdictions do have licenses for real estate sales and rental, so you’ll need to comply with the laws in your area to qualify for a broker’s license.

Additional Resources for Starting a Real Estate Business

1) Realtor.com Resource Hub

If you’re looking for marketing tips, industry insights, strategy resources, and much more, the Resource Hub at Realtor.com has what you need. From building client relationships to growing your brand, Realtor.com includes a wide variety of valuable information for realtors of every experience level.

2) RealScout

RealScout is an app that connects homebuyers with qualified realtors, allowing them to virtually search for homes together. With comprehensive listing tools, a tech-savvy home search, and databases full of buyer info, RealScout is an excellent resource for a realtor.

3) Roomle

An indispensable resource for virtual home tours, Roomle allows you to populate your images with 3D virtual furnishings. This gives your potential buyers the ability to take 3D tours of the space without even setting foot in the home, and it saves you a ton of money compared to hiring an actual staging company.

4) Real Estate Champions

Are you in the market for real estate training and coaching? Real Estate Champions offers live coaching sessions, video classes and mentoring, and many free resources for realtors. To get started, they offer a free real estate coaching consultation so you can try their service before you buy.

5) Inman

Inman is a real estate news and analysis company providing independent journalism about the industry. From newsletters and trending topics to live events and interactive sessions with industry analysts, Inman provides realtors with a broad selection of helpful resources.