LLC Properties: Everything You Need to Know
LLC properties businesses are popular with real estate owners because of limited liability protection. 3 min read
LLC properties businesses are popular with real estate owners because of limited liability protection. Many real estate property owners prefer LLCs because the LLC arrangement protects the identity of the owners and enables them to get a number of tax deductions. The main disadvantages of using LLCs for property businesses are the need to hire tax accountants and the high annual state taxes and fees associated with LLCs.
LLCs and Real Estate Companies
The LLC concept was first introduced in the state of Wyoming in 1977 to cater to the unique needs of oil companies. The business type subsequently spread to all U.S. states. A major milestone for LLCs was reached in 1988 when the IRS decided to give LLCs partnership tax treatment. This opened the door for LLCs to have pass-through tax status. This tax treatment enables LLCs to avoid double taxation.
Any profits that the LLC makes are forwarded to the LLC owners, who must still pay individual income tax. However, the fact that LLCs do not pay the corporate tax can enable LLC owners to save big on taxes. The LLC structure has become the entity type of choice for real estate businesses for a number of reasons.
Advantages of Registering Your Real Estate Businesses as an LLC
- Limited liability protection: Limited liability protection is a much-coveted benefit associated with big corporations. The LLC entity type makes this protection a reality for owners of relatively smaller businesses. Because of a surge in the number of lawsuits against property owners in recent years, limited liability protection is a must for real estate owners who have various properties. For example, it has become common for property owners to be sued because of slip and fall injuries and similar accidents. If a court rules against the property owners in such a case, the personal assets and other properties of a property owner can be exposed to liability if they are registered under a partnership or sole proprietorship. However, if the property is owned by an LLC, the other properties and the personal assets of the owner will be protected.
- Privacy protection: Unlike corporations, in many states, the public state records of LLCs do not divulge the owners of the LLC. This identity protection is useful to some property owners who want to have a measure of privacy. It may come in handy to protect the owners from negative publicity during lawsuits or accidents at the property.
- Ease of formation and maintenance: Compared to corporations, LLCs are relatively easy to form and maintain in most states. LLCs also are not required to follow corporate formalities, such as appointing a board of directors, recording corporate resolutions, and holding board of directors and shareholders' meetings. This can save the company valuable time and money.
- Avoiding double taxation: LLCs are pass-through entities. As such, they do not pay corporate tax to the IRS. Corporate tax would otherwise take away about 21 percent of the LLCs profits, hence reducing the income of the owners.
- Tax deductions: There are a number of tax deductions only available to real estate LLCs. Claiming such deductions can significantly reduce the tax burden of LLC owners compared to real estate businesses that aren't LLCs.
- Foreign investments: Unlike S corporations, which aren't allowed to have foreign shareholders, foreign investors who aren't U.S. residents can be members of LLCs. This allows them to own real estate property in the United States.
Disadvantages of Real Estate Property LLCs
- A haven for criminal activities: Because of the privacy granted to LLC owners, some individuals have used real estate LLCs to hide money obtained from illegal activities.
- Extra expenses on accountants: The tax laws that govern LLC real estate properties are very complex. For the property owners to comply with every requirement and take advantage of every deduction, the LLC would likely need the services of an accountant. This can put an extra financial burden on the LLC.
- State taxes and filing fees: Many states don't recognize the pass-through status of LLCs and levy LLC taxes. California, for example, levies a minimum annual LLC tax of $800. In addition, virtually all states in America require LLCs to file annual reports and pay maintenance fees. These can put an extra strain on an LLC's finances compared to filing as a partnership.
If you need help with property LLCs, you can post 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, Stripe, and Twilio.