Buying Real Estate Under LLC: Everything You Need to Know
There are advantages to buying real estate under an LLC. An LLC, or limited liability company, is a way of putting a business together to enjoy certain benefits of both a sole proprietorship or partnership and a corporation. 3 min read
2. Liability Insurance
3. The Advantages of LLCs to Real Estate
Updated October 29, 2020:
There are advantages to buying real estate under an LLC. An LLC, or limited liability company, is a way of putting a business together to enjoy certain benefits of both a sole proprietorship or partnership and a corporation. Anybody looking to own and profit from real estate needs to think about whether an LLC is the right move for them.
What Is an LLC?
LLCs originated in 1977 in Wyoming, where they were created as a way to enable oil investment, though soon all 50 states had LLC laws. An LLC treats its income as “pass-through” for tax purposes, meaning any profits the company makes are treated as personal income of the owners. This separates them from corporations, which get taxed twice — first at a corporate rate on the profits and then again on the money the owners receive as income. However, LLCs also limit the liability of the company in legal situations to the assets held by the company, instead of allowing judgments and debts against the personal assets of the company's owners.
Some real estate companies, seeing the fees and legal complexities associated with LLCs, decide instead to stay organized as sole proprietorships or partnerships and instead purchase liability insurance. While liability insurance can be very useful in the event of a catastrophe, it is also carefully designed to limit the costs to the insurer in many cases. If something goes wrong and the circumstances are just so, the company might be left with a stack of bills to pay.
The Advantages of LLCs to Real Estate
There are some positive aspects of LLCs that are particular to the real estate business.
- Liability limitations. When people injure themselves on private property, they may be entitled to a judgment against the assets of the property owner. Those damages start with medical costs and lost work time, but might climb even higher with assorted other factors. A sole proprietorship or partnership counts the assets of its owners as vulnerable to seizure to pay off debts incurred in the court proceedings; an LLC is only as vulnerable as the worth of the assets in the LLC itself.
- The “pass-through” status of an LLC applies to income earned from rents and other uses of real estate properties. As such, the money is not subject to separate corporate taxes on top of taxes on personal gains. Any real estate company will be looking to avoid a double tax bill, and an LLC can make that happen.
- LLCs are simpler in terms of management delegation than corporations or partnerships.
- LLCs pay lower state fees to continue their status than corporations in most states.
- Profit distribution in an LLC is a lot more flexible due both to their tax advantages and less stringent requirements on how they pay out profits. Specifically, LLCs are not typically required to pay out proportionately to investment in the manner of a corporation.
- LLCs can easily gift ownership shares to heirs, allowing the company to successfully continue past the natural lives of its founders.
- LLCs, unlike S corporations, usually allow for foreign investment and ownership.
- Privacy. An LLC can own the property on all public records, keeping the owners behind the LLC secret in case someone involved in the company wants to keep their investment out of the public eye. This is especially useful to celebrities or silent partners.
LLCs are not the solution to every problem, of course. For instance, a new LLC will have problems getting loans directly from banks since they will be nervous about the liability shield. This can be circumvented by getting the mortgage personally and then transferring the property into the LLC, though the mortgage will be something you are personally liable for as well. LLCs also cost money to form and have to be filed properly in every state they do business in. While many people prefer using LLCs to run real estate businesses, when it comes to yours, you should carefully consider all the options and make the best choice for your needs.
If you need help with setting up an LLC for real estate purposes, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.