LLC and Real Estate: Everything You Need to Know
LLC and real estate complement one another well. However, there are real estate agents think that they already exist in a business-savvy way.3 min read
LLC and real estate complement one another well. Unfortunately, a dizzying amount of real estate agents operating independently think that they already exist in a business-savvy way by belonging to any one brokerage. That, unfortunately, is far from true. Your brokerage simply supplies you with a 1099 after each calendar year — but not with a proper W-2. Essentially, you're considered by the government to be a contract worker who works independently.
This arrangement means you're the only legally bound entity responsible for your real estate practice, leaving your own finances and real estate, like your 401K and IRA accounts and your own home, at risk. By properly establishing yourself as an LLC and making sure your LLC is appropriately maintained, you can significantly reduce your exposure to financial risk.
Forming an LLC for Real Estate Investments
Before LLCs, real estate business owners who sought limited liability protection were generally subjected to using corporations to get titles. This approach created its own set of financial risk factors. However, over the last ten years, limited liability companies have become a far better-liked option for holding investment real estate properties. LLCs aren't the only option up for consideration, but most real estate investors find the benefits offered by LLCs to be the most accommodating.
In essence, if you want to learn how to start building a thriving real estate business and garner a few tax benefits but don't want to endanger your livelihood, it might be time to look into branding your real estate dealings under an LLC. If nothing else, an LLC will give you peace of mind.
LLCs vs. Liability Insurances
Perhaps most importantly, LLCs limit your financial fragility, should a lawsuit related to a property of yours come to fruition. Any lawsuit that comes against an LLC will be associated specifically with the company and not with you as an individual, safeguarding your personal finances. Also, even though it's possible to increase traditional liability insurance to cover millions in real estate damages and tenant issues, doing so doesn't guarantee that your personal assets won't be garnished or flat-out ceased.
LLCs Can Make Business Life Easier
- LLCs give a bevy of benefits that certainly apply to real estate agents. From tax breaks to handoffs, an LLC can make your business life much easier.
- Due to their inherit separation between an agent's dealing and his or her own financial assets, LLCs have more flexibility than either a corporation or a partnership.
- LLCs often pay lower state maintenance and registration fees than other non-LLC business or real estate agencies.
- It's legally possible to completely hand off ownership of any owned real estate by an LLC to significant others and family members — without having to go through the hassle of recording and executing any new deeds.
- Lenders, for the most part, will allow you to finance large financial purchases as an individual, even while owning the assets through an LLC entity under your control, as long as they're owned by you.
Claim Tax Savings and Other Exemptions
As mentioned previously, enormous tax savings can be had when you decide to designate your business as an LLC. As an LLC, you have the option of choosing an S-election on end-of-year taxes, thus giving you necessary write-offs and exemptions when filing self-employment tax. Most of those savings would otherwise not be on the table for sole partnerships or proprietors.
Minimize Risks With the Right Strategy
While there's no easy or surefire way to eliminate every risk associated with starting a real estate investment business, you can definitely better your odds of success by operating under an LLC. For one, it's far easier to purchase properties through an LLC as opposed to operating as an independent contractor. While choosing to start an LLC won't necessarily offer absolute amnesty in lawful cases or potential purchases, it will offer a litany of other advantages that make it the most desirable form of entity in many cases.
Additional Brand Protection and Overall Credibility
Aside from the added financial gains and protections afforded by becoming an LLC, there's also a layer of added credibility and brand protection that comes along with it. The labels — like CRS, GRI, etc. — that follow a business name can help usher in a new wave of sales. Plus, now that you're an LLC, your business name can't be used by anyone else.
If you need help understanding how an LLC can benefit your real estate investments, 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.