Definition

What Is An LLC?

In contrast to a traditional c corporation and s corporation, owners of limited liability companies (or LLCs) are not personally accountable for the debts and obligations of the business. In the event of bankruptcy, the owners of a limited liability company are not forced to forfeit their personal property. One of their key benefits is that limited liability corporations don’t directly pay taxes on their income. Instead, the member’s tax filings are where earnings and losses are declared.

A limited liability company may be owned, generally speaking, without restriction. This suggests that everyone, including other businesses and multinational enterprises, is welcome to join. The legal formation of limited liability firms is not permitted for some companies, such as banks and insurance companies.

An LLC is a contract that must be acknowledged by both the creating state and the owner on the organization’s articles of formation to be upheld. Articles of incorporation, which are legal documents, are submitted to the state to begin a business.

The main objective of an LLC is to shield its shareholders from direct responsibility for the debts of the business. However, fraud can happen once in a while. If it is established that the members committed fraud or cannot furnish their legal reports, the creditors may be able to pursue them and hold them personally liable.

Advantages

Advantages Of Forming An LLC For Real Estate Businesses

There are multiple different advantages of LLCs. However, many of these are limited to the state you choose to open your LLC. Moreover, there are also some separate benefits specifically for real estate-based LLCs, which involve selling and buying properties like a condo, homes, houses, land, and rentals to tenants and landlords:

A number of tax benefits and programs are also offered to LLCs. However, those usually vary from state to state, such as the state of Idaho has different policies which can be less taxing than other states.

Disadvantages

Disadvantages of a Real Estate LLC

The disadvantages of opening a real estate LLC  are far less than the disadvantages of opening a real estate organization with a different structure. Some of these disadvantages may include the following:

LLC Formation

How to Form a Real Estate LLC

While it may seem time-consuming and hard, starting a real estate LLC is fairly easy. All you need to do is to follow a few simple steps:

1. Choose a unique name for your real estate LLC
2. Choose a Registered Agent
3. File your Articles of Organization
4. Create an Operating Contract
5. Obtain an EIN

Choose a unique name for your Real Estate LLC

The choice of a business name is the first stage in forming an LLC. However, there are a few naming requirements that you must follow, such as: 

• To prevent someone else from registering your LLC’s name before you, it is imperative to reserve the name in advance. 
• Additional legal documentation may be necessary if you identify as an “attorney” or “lawyer.” 
• Any other registered entity in your state cannot share the same name as your limited liability company.
• The letters LLC, which stand for limited liability company, must appear in your firm name.

Choose a Registered Agent

You must select a registered agent for your LLC because doing so is necessary. An organization engages registered agents to obtain and handle all necessary official and legal paperwork from the government. It is also important to note that the registered agent charges and rates may vary depending on which state you choose to open your real estate LLC in.

Your company’s registered agent could be a private person or an outside organization. A member of your organization may be chosen to serve as the registered agent. However, a registered agent must adhere to the following rules:

You must ensure that the organization you select to represent your LLC must provide registered agent services. All business documentation must be delivered to the registered agent during regular business hours.

File your Articles of Organization

Your articles of organization must be submitted to the secretary of state’s office, depending on which state you are based in, since it is a requirement. Your LLC is created by a legal document called the article of organization, which contains all the relevant details about your company, which is why it is a requirement to file.

It’s crucial to finish all of your paperwork before forming an LLC  In certain states, such as Missouri, submitting articles of organization costs $100, while this rate may be lesser or higher in other states, such as California.

Once you have completed and submitted your articles of organization, the articles of your organization will be examined by the Secretary of State, and the Secretary of State will issue you a certificate attesting to the formation of your LLC and its registration there. You can create a business bank account and get an employer identification number with the help of this certificate.

Create an Operating Contract

Your limited liability corporation’s general business procedures are outlined in the LLC operating agreement. In many states, an operating agreement is not required to be filed. However, you must create an operating agreement to ensure your business’s smooth operation.

An operating agreement is essential to how an LLC operates. By creating an operating agreement, any financial disputes can be resolved. Without an operating agreement, the courts could settle disputes in accordance with state law. An operational agreement document may need to contain the following clauses: 

• Losses and liability provisions
• The LLC’s legal name and address
• The LLC’s time frame
• Name and residence address of the registered agent
• Information about the articles of incorporation
• Your company’s goal
• The members’ names and what each one of them contributed
• How to divide profits and losses
• The process for admitting new members
• Information about the management of the LLC

Obtain an EIN

The Internal Revenue Service grants your business an EIN, or Employer Identification Number, a nine-digit number that makes you responsible for paying taxes. An EIN is necessary to file taxes with the IRS.  Employer identification numbers are advantageous to the company. Benefits include: 

• It aids in establishing a legitimate business bank account for your LLC 
• A federal employer identification number will assist you in managing and filing your taxes
• The capacity to hire staff is one of the key goals of having an EIN

LLC Taxes

Applicable Taxes for Real Estate LLCs

There are multiple different types of taxes that apply to an LLC. However, those are mainly dependent on what state you are in.

Depending on your state, many of these taxes and costs can be very high or very low. An example of this is that Idaho’s applicable revenue tax rate is only 6%, which is fairly less compared to other states.

Moreover, registered agent costs may also vary depending on your state as well.

Costs

Costs of Forming a Real Estate LLC

Generally, the costs can be categorized into two main domains: startup and maintenance costs. Contacting the finance department would help if you learned of several annual charges.

The costs and finances of an LLC vary in each state, so be sure to check the details for the state you are interested in forming an LLC:

Comparisons

Is LLC The Best Entity For Me?

Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.