How To Start a Real Estate LLC
Starting a real estate LLC has slowly become a tradition among the newer entrepreneurs and business owners of today, as it has various tax benefits and can help owners avoid double taxation. Moreover, the rules and regulations for real estate LLCs are much laxer than other real estate corporations with different structures. Although it may seem like a lot of work, we have compiled all the steps in this guide below to help get you started on forming your real estate LLC.
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 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:
Benefits of limited liability protection in an LLC structure
An LLC has liability protection, which shields the owners from being held responsible for the company’s debts or personal assets in case of lawsuits or bankruptcy. This is one of the main benefits of owning an LLC This is one of the main factors influencing people’s decisions to form an LLC rather than a traditional corporation with a standard corporate structure.
Advantages of pass-through taxation for LLCs
Since LLCs are not subject to double taxes, most states recognize them as pass-through taxation corporations. Double taxation is the term used to describe the taxation of commercial profits. The owners’ and investors’ share of the company profits is also taxable on a personal level.
Lower fees and tax burden for LLCs compared to other corporations
Most states in the U.S. impose a fee on the authorized number of taxes on companies. One of the benefits of owning an LLC is that you do not have to pay as much as other corporations. Thus, making the overall registration and maintainable fees lower for LLCs.
Simplified ownership transfer and tax advantages in LLCs
Another great benefit of owning an LLC is that the transfer of ownership is less complex than how it would be in a corporation of a different structure. Moreover, gifting property to someone can also help the owners to avoid several taxes.
Flexible profit distribution for real estate LLCs
If a real estate company registers itself as an LLC, investors have a lot of flexibility regarding profit distribution. LLCs do not have to be proportionally like corporations in distributing cash flow.
Flexible management options in LLC ownership
Another fair benefit of owning an LLC is that, unlike normal corporations where management duties are only for the officers and directors, you can easily manage the responsibilities and managerial duties by either handling them yourself or handing them over to a third party.
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 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:
Tax obligations on unrealized profits for LLC members
Even if the members have not yet realized their profits, they may still be required to pay individual taxes on their portion of the shares. This poses a serious issue because even if there are multiple owners or shareholders who do not receive their fair share of profits, they are still responsible for paying taxes on their shares.
Challenges of decision-making and conflict resolution in real estate LLCs
The fact that each member must agree for a decision to be valid is another disadvantage of owning a real estate LLC. If there are several members or owners, there may be arguments about business decisions. Conflicts of many kinds may result from this.
Comparing costs of LLC formation and state-specific fees
There is an additional price levied for formation along with annual report costs and franchise tax expenses, so if you compare establishing an LLC to forming any other corporation, it might cost more. These costs vary from state to state. To determine the fees, it is best to contact your state secretary’s office.
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:
- Choose a unique name for your real estate LLC
- Choose a Registered Agent
- File your Articles of Organization
- Create an Operating Contract
- 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
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 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.
State filing fee
Registered agent service
LLC formation service
Business license and permits
Employer Identification Number (EIN)
Initial legal and accounting fees
Office setup and miscellaneous
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:
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