Investment Property LLC: Everything You Need to Know
If you’re forming an investment property LLC, you’ll want to be familiar with the business structure of an LLC which is a separate legal entity from its owners.3 min read
2. Advantages of an LLC
3. Disadvantages of an LLC
Updated July 10, 2020:
If you’re forming an investment property LLC, you’ll want to be familiar with the business structure of an LLC. An LLC, or limited liability company, is a separate legal entity from its owners. An LLC can obtain an EIN, open a business bank account, and do business under the LLC business name. The main benefit of forming an LLC is that the owners, also known as members, have limited liability. Therefore, if a lawsuit is brought against the LLC, the personal assets of all members are protected.
Real Estate LLCs
Real estate investors have found that investment property LLCs are the most beneficial when overseeing various properties due to the limited liability, increased flexibility, simple formation, and tax benefits. With that said, you should be mindful that an LLC might not be the best choice for all real estate investors.
LLCs provide added protection on top of simply carrying liability insurance. But, if you choose not to form an LLC, but rather oversee the investment property in your own name, you will have to carry liability insurance, which can carry risk. For example, liability insurance policies generally have thresholds and exceptions. This means that not all issues can be protected under the insurance policy.
If you own more than one investment property, you can choose to create separate LLCs for each one. You shouldn’t create one LLC for multiple properties, as this can cause potential legal issues. For example, let’s assume you own an investment property, and a tenant injures him or herself on that property. The tenant now brings a suit against your LLC, and therefore, all assets belonging to the LLC can be affected. This means that if you have other investment properties belonging to that LLC, you are at risk of losing those properties if the damages from that legal suit are great enough. However, if you form separate LLCs for each property, then the assets of the other LLCs, as well as your own personal assets, are protected.
Advantages of an LLC
There are many other advantages to forming an LLC, aside from the limited liability protection. Some other advantages include:
- Pass-through taxation
- Greater flexibility in terms of management structure
- Lower fees
- Ability to distribute profits as it sees fit
LLCs offer pass-through taxation, meaning that all LLC profits and losses are reported on the owner’s personal tax return. C Corporation, however, is subject to double-taxation – at the corporal and personal level.
LLCs have greater flexibility in terms of management structure; all members can draft an operating agreement indicating how they wish the LLC to be managed. In many states, LLCs can pay lower registration and maintenance fees than corporations.
Furthermore, owners can distribute profits as they see fit, so long as it is determined in the operating agreement. This is why drafting an operating agreement is so important for an LLC.
Disadvantages of an LLC
Along with the many benefits of operating an LLC come some disadvantages. While the registration costs of forming an LLC might be less expensive, the overall setup costs of forming an LLC could be higher.
Financing can be another disadvantage for LLCs. Generally speaking, financial institutions are more reluctant to provide financing for LLCs as opposed to other business structures, i.e., corporations. Even if you can obtain financing through your LLC, you might need to use your own name and credit history in order to obtain such financing.
While you are entitled to limited liability through your LLC, some plaintiffs can “pierce the corporate veil” finding your personally liable if the lawsuit involves allegations of fraud.
Another issue that could arise is if an LLC owner has a piece of property in his or her name, and wants to transfer the property into the LLC’s name. While this can be done, there is a risk of triggering the due-on-sale clause, meaning that you would instantly owe the remainder of the loan before you can successfully transfer the property to your LLC.
If you need help forming your investment property LLC, 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.