Forming an LLC to Buy Real Estate: Everything You Need to Know
When forming an LLC to buy real estate, there are some key pieces of information you must know. 3 min read
2. Privacy Control and Inheritance for LLCs
3. Pitfalls of LLCs
4. Forming an LLC
5. Mistakes to Avoid in Forming A Real Estate LLC
When forming an LLC to buy real estate, there are some key pieces of information you must know. Offering a range of benefits in terms of personal and invested assets, forming an LLC may be the right step for you. If you've been considering an LLC structure for your business, here's what you need to know.
Limited Liability Company (LLC) and Real Estate Assets
Similar to a partnership, an LLC will benefit from the legal protection of real estate and personal assets. This is the same level of protection that a corporation offers, but does not require fees or excessive paperwork. Depending on the state in which you plan to operate your LLC, the exact rules will vary. In terms of real estate:
- All personal and investment real estate will be considered an asset to an LLC. This includes both primary and vacation homes.
- In turn, LLCs benefit from additional protection in terms of real estate being seized. This is possible for LLCs with a single owner or member.
- The LLC may even be eligible for special loan terms of they require a loan to purchase real estate.
- Although legal counsel is not required to set up an LLC, as it is fairly straightforward, assistance is recommended in terms of the LLC's operating agreement. A lawyer should look over the paperwork to ensure the owner's interests are protected.
Privacy Control and Inheritance for LLCs
When you own an LLC, know that:
- If you move personal assets to your LLC, this does not mean you will lose control over those assets.
- You will retain complete control over your assets — especially if you own a single-member LLC.
- If you would like to reduce inheritance tax and any associated issues, add your family member(s) as LLC owners.
- In doing so, your assets will flow to these heirs without you needing to pay high inheritance taxes.
Pitfalls of LLCs
It is important to know that if a lawsuit is ever filed against your LLC, any assets and property can be seized. When there are multiple members, even if a lawsuit is only filed against one of those members, the whole LLC can suffer the consequences. At that point, a lien may be placed against an LLC. Also, be aware that paying personal expenses through the LLC can cause the company to lose its limited liability status. That is, the court could argue that the member(s) transferred assets illegally in order to benefit from additional protection.
Forming an LLC
If you are interested in forming an LLC to buy real estate, you must first submit "articles of organization" — which may be referred to as a "certificate of organization" in your state. Applicants can either file online or in-person, with fees generally ranging from $100 to $1,000.
Many states provide a blank, single-page form in relation to the articles of organization, requiring basic information. These details include:
- The LLC's name.
- The LLC's address.
- The "registered agent's" contact information.
- Depending on your state, you may also need to list all of the names and addresses of LLC members.
Once this step is complete, you will need to create an LLC operating agreement. This is a crucial step as it will state each member's rights and responsibilities, as well as their percentage interests and associated shares of the profits. Legal counsel is recommended in order to review this document.
Mistakes to Avoid in Forming A Real Estate LLC
Real estate LLCs are designed to legally separate the owner from the business, and come with certain benefits and protections for both the owner(s) and the investors. Making any of the following mistakes can significantly undercut the usefulness of these protections.
- Not forming an LLC from day one.
- Failure to understand the corporate lawyers. When first forming an LLC, it is recommended that investors visit SBA.org to better understand the structure of the LLC.
- Piercing the corporate veil, which can lead to greater owner liability.
- Not hiring a professional in terms of legal counsel. As mentioned, a lawyer should at the very least review your LLC operating agreement.
- Failing to take time and appropriate precaution while planning
If you need help forming an LLC to buy real estate, 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.