If you’re starting a real estate business, you may be interested in forming a limited liability company (LLC).
The LLC is an incredibly popular business structure for many different types of businesses, including real estate. An LLC is easier and cheaper to form than a corporation, it provides limited liability protection that you won’t receive as a sole proprietorship or general partnership, and it allows you to choose the way you want your business to be taxed.
While the LLC is a great fit for many real estate businesses, it won’t be the perfect choice for every entrepreneur. In this guide, we’ll discuss all the relevant details of real estate LLCs in an effort to help you decide whether this business structure is right for you. Let’s get started!
Tip: If you decide to start an LLC for real estate, there are plenty of cheap LLC services (like LegalZoom and ZenBusiness) that can take care of the paperwork for you.
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?
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.
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 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.
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.
Finally, it’s often simpler to complete real estate transactions through an already-existing LLC than it is to transfer it 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.
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.
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.
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.
The third step is to compose a document 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.
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.
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.
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 to maintaining your corporate veil, and if you fail to keep your finances strictly separated, you run the risk of losing your personal asset protection.
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.
Can I Hire Someone to Form My Real Estate LLC?
If you would rather not go through the hassle of forming your own real estate LLC, you’re in luck. There are dozens of reputable online services that can save you a ton of time, while also costing far less than hiring a business lawyer to form your LLC. If you want to take a look at the top options, head on over to our guide to the seven best LLC services online.
In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for real estate LLC formation service:
- ZenBusiness ($39): ZenBusiness truly has it all. They provide complete LLC formation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s hard to go wrong with an offer like this.
- Northwest Registered Agent ($79): Northwest is a bit more expensive than ZenBusiness, but their industry-best registered agent service (included at no extra charge) includes local scanning of every document they receive on your behalf. They also have the best customer support available for LLC formation services. If you’re looking for more of a premium service, Northwest is an excellent choice.
- Incfile ($0): Incfile has an LLC formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and Incfile is an excellent choice for LLC formations.
In our opinion, there are far more advantages than disadvantages when it comes to forming an LLC for real estate.
The flexibility of this business model, paired with its ability to shield your personal liability, makes it an excellent choice for real estate businesses. In addition, the ability to deduct a rental property mortgage and/or loans for improvements to your properties is another big benefit.
Whether you choose to form a real estate LLC or a different business entity — or whether you opt to create your own LLC or use a reputable service — we wish you the best with your business endeavors, and we hope this article helped you improve your understanding of how to start an LLC for real estate!