1. LLC for Real Estate Overview
2. LLC vs. Liability Insurance
3. LLCs Limit Personal Liability
4. Pass-Through Taxation for Single & Multi-member LLCs
5. LLCs Can Make Business Life Easier

Business owners can choose between an LLC or corporation for real estate investments. LLCs are an increasingly popular choice for real estate investors. It gives the investor limited liability coverage without the overhead that comes along with forming and managing a standard corporation.

LLC for Real Estate Overview

It's only in the past decade that limited liability companies (LLCs) have been the preferred business structure to hold title to investment real estate properties. Before using LLCs, real estate investors who wanted limited liability protection had to incorporate their companies.

LLC's were introduced in Wyoming in 1977 with Florida following suit in 1982. Now all states recognize LLCs as a business entity.  Real estate investors favor LLCs because:

  • They are easier to form.
  • They offer liability protection.
  • They provide potential tax breaks.

LLC vs. Liability Insurance

While there are benefits to holding real property through an LLC, you need to evaluate whether it is the right medium to use for your company. Some real estate investors may question whether it is worth the paperwork to form an LLC to hold title to real investment property because they can get limited liability insurance. However, even with liability insurance, a real estate investor risks liability since liability policies typically have limits. On the small chance the damage or loss exceeds the policy limits, then the investor's assets are at risk.

LLCs Limit Personal Liability

An LLC protects your assets from potential lawsuits involving your investment property. For example, an owner of an investment property leases a property to a tenant who decides to host some guests. During the event, one of the tenant's guest falls and is seriously injured. Given today's litigious environment, the injured guess may attempt to file a complaint, citing the rental property's "unsafe condition." Typically, the property owner would be one of the parties named in the lawsuit.

If the real estate investor owns the property, he could risk losing some or all his assets. On the contrary, if the LLC owned the property, the investor's assets would be protected from the claim due to limited liability protection.

Pass-Through Taxation for Single & Multi-member LLCs

LLC owners (known as members) also benefit from pass-through taxation. In 1988, the IRS released Revenue Ruling 88-76.  In this law, Wyoming LLCs would be taxed as a partnership and get limited-liability treatment like a C corporation. Because of this ruling, property investors can avoid double taxation while benefiting from liability coverage. These benefits apply to both single-member LLCs and multi-member LLCs.

If you are the sole owner of a real estate investment LLC, then you are considered a “disregarded entity.” As a disregarded entity, your LLC's income and capital gains pass through to you, the member, and you will report the income when you file your taxes. It is the same as the process a sole proprietorship follows except, as an LLC member, you still get liability coverage.

The IRS taxes multi-member LLCs like they do partnerships. The IRS only requires the LLC to file an informational tax return without paying any taxes. Comparable to partnerships, multi-member LLCs pass profits and losses through to members who report their portion of income or losses on their tax returns.  Overall, both single member and multi-member LLCs provide pass-through taxation and limited liability protection for its owners.

LLCs Can Make Business Life Easier

LLCs offer benefits that other business structures do not provide that real estate investment companies along with many other companies enjoy.

  • LLCs have more flexibility with their management structure than either a corporation or partnership.
  • Since many state filing fees depend on the number of shares, LLCs may pay a lower state filing and annual fees than a corporate entity.
  • LLC members also have more flexibility in profit distribution.
  • Unlike S corporations, LLCs can have foreign members.
  • LLC members have the flexibility to gift the company's membership interest to their heirs each year.

In summary, LLCs protect their owners more than limited liability insurance and do not require corporate administration. Before forming your company, check to see if LLCs are right for your real estate investments.

If you need help setting up an LLC for your real estate investments, 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.