Attorneys
If you have plans to acquire a real estate property, setting up a limited liability company (LLC) is your best bet. It ensures that the business entity acts as the legal owner of the business transactions and dealings rather than the individuals that form the LLC.
LLC In Real Estate
Just like every other sector of the global economy, the real estate market has been recovering and the opportunity to invest and earn is huge. Yet, it is important that you employ the best strategy to navigate the market. One of the shrewd strategies you can leverage as a real estate investment is the formation of an LLC.
Just like a sole proprietorship, an LLC is a type of business ownership. However, in this case, it involves more than one owner. An LLC is formed by investors who intend to separate themselves as individuals from the business. In other words, in case there is a reason for lawsuits, the company will be sued instead of the members of the LLC.
So, in case the organization is charged or fined, it will not affect your personal assets or any member of the LLC. Indeed, no one wants to deal with lawsuits or bankruptcy but you have to plan for them just in case.
Pros of LLC In Real Estate
As an entrepreneur, it is essential that you evaluate your decisions by considering their pros and cons. Some of the advantages of forming an LLC include:
Generous Interest Rates
You will always need a source of funding for your business and you might need to contact mortgage lenders. In such situations, creditors will trust your organization more when they know it is an LLC and that will give you better interest rates and loans terms unlike when it is a sole proprietorship.
Restricted Personal Liability
The fact that the debt or lawsuits of the company will not affect the individual members of the business enterprise is one of the reasons forming an LLC makes perfect sense. Despite the relative stability of the real estate market, nothing is set in stone in the business world.
There is a possibility of debt and bankruptcy regardless of the products you offer as an entrepreneur. It is also possible that a disgruntled client sues your company regardless of your commitment to satisfying your customers. So, it is important that you protect your personal assets by separating them from the company.
Variety Of Options
Another interesting feature of an LLC is that you can file it in different states. This comes in handy, especially when your state of residence has restricted LLC laws. You can find a state with a more relaxed LLC regulation that perfectly suits the operations of your organization.
Tax Benefits
The aim of every business investor is to maximize profit but restrictive tax policy can limit this goal. Operating an LLC helps you to avoid double taxation. By separating your personal properties from your company’s finance, your real estate holdings will not overflow into your personal finance, effectively eliminating double taxation.
Cons of LLC In Real Estate
Despite the scintillating advantages of operating an LLC, it also has some demerits you need to consider. Here they are:
Transfer Tax Issues
Indeed, operating an LLC helps you to avoid double taxation but it can also cause transfer tax issues. In states such as Delaware, transfer taxes do not apply provided the ownership interests do not change prior to and after an individual transfer to an LLC.
However, things are different in some states. For example, in states such as Pennsylvania, transfer tax applies regardless of whether the ownership interest changes or not. This is one of the reasons you might need to consider other states when registering your company as an LLC.
The “Due on Sale” Clause
The “due on sale clause” is a nightmare for many real estate investors transferring individual ownership of the company to an LLC. This clause demands that you pay the full mortgage balance of a property when you decide to sell it.
When you choose to transfer the property from individual ownership to an LLC, it can be interpreted as a sale by mortgage lenders, thereby attracting a penalty or legal issue. Therefore, it is recommended that you seek a waiver from the lender before the transfer.
Forming Your LLC In Real Estate Investment
Now that you understand the pros and cons of setting up an LLC real estate, it is time to learn how to go about it. The following steps will help you achieve your goal:
Know Your State’s LLC Regulation
Due to the differences in LLC regulations in different states, it is vital that you know what is obtainable in your state. It is possible that you find a state that offers more flexibility than your state.
Choose A Brand Name
Selecting a business name is essential to creating a unique brand and attracting the right clients. Do your research to ensure that you pick a strategic and uncommon name.
File An Articles of Organization Document
Your Article of Organization contains the name of your company, start date, primary address, members of the LLC, and a short description of the operations of the company. You will submit this file to the office of the Secretary of State and will be required to pay the fee for starting an LLC.
Generate An Operating Agreement
Some states such as Delaware and New York do not require an operating agreement. However, it is recommended that you get one. It describes the division of the business and the role of each member of the LLC in decision-making.
Discover Publishing Regulations
Some states require you to publish an ad in a local newspaper when creating an LLC. This is necessary to inform the public about your decision. It is also helpful to obtain licenses and permits.
