Purchasing investment property through LLC is generally a positive move to protect your assets.

Should You Form a Limited Liability Company for Your Investment Property?

One of the primary reasons someone chooses to form a limited liability company (LLC) is to protect their assets. If you are considering forming an LLC, it is important to weigh the pros and cons of forming this entity as compared to forming a corporation or a partnership.

Deciding whether or not to place your real estate properties into an LLC depends on your goals and what you would like to accomplish by forming an LLC. It is also dependent on your position as an investor. One reason to consider forming an LLC is if you already own a property and are considering buying another one. Another reason to consider forming an LLC for your investment properties is if you own several different properties within multiple states and you feel you may benefit from the legal protection afforded by an LLC.

During the last ten years, limited liability companies have become one of the most common and preferred types of business entities for use in holding title to real estate investment properties.

History of the Use of LLCs for Investment Properties

It was not until 1977 that limited liability companies actually came into existence. Limited liability companies originated in the State of Wyoming when special legislation was enacted in order to accommodate oil companies and their needs. Before LLCs were created, real estate investors were limited to using corporations in order to acquire titles to property if they wanted limited liability protection. Unfortunately, corporations are an entity with potential drawbacks.

A few years later, in 1982, the State of Florida enacted its own LLC statute. Presently, all fifty states now have some form of an LLC business structure enacted with their own legislation.

Advantages of Forming an LLC for Your Investment Properties

One of the primary advantages in choosing to form an LLC for your investment properties is that you gain insulation from exposure to personal risk. Additionally, LLCs carry with them the benefit of easy administration along with tax benefits. For these reasons, forming an LLC for your investment properties is generally an attractive option for:

  • Protecting your assets
  • Protection in case of a lawsuit
  • Pass-through taxation
  • Ownership transfer

Protecting Your Assets

One of the main reasons investors form LLCs is because buying a real estate property and renting it involves liability. Tenant injuries occurring on the property can leave real estate property owners open to lawsuits for damages. Forming an LLC protects your personal assets in these situations.

Protection in Case of a Lawsuit

Any lawsuit related to the rental property owned by you would typically include you as a defendant. If this were to happen, you would have to defend your personal assets. However, if that property is actually owned by an LLC, your investor risk would then be shielded due to the protection of the company. If you were to lose the suit, the most you could lose would be the assets held by your LLC.

Pass-through Taxation

Another benefit to forming an LLC is pass-through taxation. Some real estate investors choose to operate their business structure as an LLC solely because of the tax benefits. Pass-through taxation means you do not have to pay business-level taxes. Instead, you are able to report the company's losses or profits at a lower rate on an individual tax return. Because the LLC is not taxed, you (as the real estate owner) would then be able to avoid a scenario in which you are double taxed.

Ownership Transfer

An additional perk of forming an LLC for your investment properties is that you would be granted the ability to transfer your shares as an owner of the LLC without the need to execute a new deed. You may desire to transfer your shares as a gift to someone else, or as part of an inheritance. Without the requirement of a new deed for this purpose, there would be less paperwork, fewer fees, and you would also have the benefit of more flexibility when transferring your shares.

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