1. Real Estate LLC: Everything You Need to Know
2. Benefits of a Real Estate LLC or Incorporation
3. LLCs Limit Personal Liability
4. Pass-Through Taxation for Single & Multimember LLCs
5. Operating Agreement Should Include Tax Information
6. Disadvantages of an LLC
7. Explore Your Options
8. Minimize Risks with the Right Strategy
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Real Estate LLC: Everything You Need to Know

A Real Estate LLC is a Limited Liability Company (“LLC”) that operates in the real estate industry.

Benefits of a Real Estate LLC or Incorporation

The advantages of selecting to operate your real estate business as an LLC are endless; but some of the benefits include:

  • Tax savings. As an LLC, you can choose S-Election on the tax form. This will offer tax benefits that cannot be attained by those operating a sole proprietorship or other type of partnership.
  • Less risky. In an article published in the Wall Street Journal in January 2011, it was discovered that those who incorporated as an S-Election under an LLC are ten times less likely to be inspected by the IRS than companies operated as a corporation via Schedule C.
  • Incorporating your real estate business as an LLC can provide you with additional credibility as opposed to real estate businesses that don’t incorporate.
  • You can benefit from financing as most financial institutions will not lend money to businesses that aren’t incorporated. Furthermore, once you incorporate your real estate business, you can obtain a Certificate of Good Standing from the Secretary of State, which indicates that your real estate LLC is in good standing. This further helps you obtain financing.
  • If you establish an LLC for your real estate business, you cannot be held personally liable or responsible for the expenses and obligations that your LLC incurs.
  • LLCs offer much more flexibility than corporations and partnerships.
  • There are few compliance requirements when operating an LLC, as opposed to corporations and partnerships.
  • Flexible management structure. You can establish your LLC however you see fit. But if you choose to operate an LLC, you can choose to hire managers if you wish to do so; however, this is not mandatory. With a corporation, you would be required to hire a board of directors to oversee the overall operations of the business who will have a significant amount of oversight in the day-to-day work.

LLCs Limit Personal Liability

Although this was mentioned above as one of the many benefits to incorporating as an LLC, it is probably one of the most important things to keep in mind. LLCs are known to limit personal liability for any debts incurred by the business, including legal suits. For example, assume that you own a real estate store front for your LLC. A client is injured in your office and sues the LLC. The injured person cannot come after you personally, and therefore, you cannot be a defendant in the legal suit.

Pass-Through Taxation for Single & Multimember LLCs

C corporations are subject to double taxation—once at the business level and again when bonuses are dispersed to stockholders. Even though the owners of corporations can attain pass-through taxation by creating an “S” election, S corporations are the ones that are subject to numerous other limitations and necessities.

Since the LLC is not a separate tax entity as a corporation is, it is a pass-through tax entity, similar to a partnership or sole proprietorship. Therefore, the profits and losses pass through the LLC to the owners who report the information on their personal tax returns. But remember that they are not personally liable for such business losses. While the LLC is viewed as a pass-through entity, it wholly depends on how many owners are in charge of the LLC.

For single owners, the LLC itself will not pay taxes and does not need to file a tax return with the IRS; therefore, as previously noted, it will all be done on your personal tax return. The information must be submitted with Schedule C. However, if the LLC has multiple owners, the LLC is treated as a partnership for tax purposes. Therefore, the LLC owners will each pay taxes on their share of the profits on their personal tax returns, utilizing Schedule E. If running a multi-owner LLC, this information should also be set forth in the Operating Agreement.

Keep in mind that a few states charge the LLC tax on the amount of revenue the LLC earns, in addition to the income tax the owners are required to pay. For example, California charges between $900 and $11,000 to the actual LLC for revenue in excess of $250,000/year. Additionally, some states require annual fees, such as a franchise fee or registration fee that must be paid by the LLC. Therefore, it is important to ensure that the operating agreement sets forth how these payments will be made, and which owner(s) incur the fee.

Operating Agreement Should Include Tax Information

If drafting an operating agreement for your real estate LLC, you should divide up the profits among all owners (members). This is particularly important for tax purposes. You will want to educate yourself on the tax penalties and distributive shares in terms of what you could owe on a personal level. For example, assume that you own a real estate LLC with 2 other owners. Overall, you own 60% of the business. You will be entitled to 60% of the business’s profits and losses. However, if you choose to divide the owners’ interests in a different way, that doesn’t parallel the ownership interest, then this must be stated in the operating agreement.

Disadvantages of an LLC

  • You may incur ongoing fees if forming an LLC for your real estate business. Since you will be required to file the Articles of Organization, there could be ongoing fees and reports to draft keeping up with such requirements. Additional fees could include franchise tax fees. A sole proprietorship and general partnership, however, do not require formation documents to be filed with the state. Some states, including Arizona, requires an LLC owner to publish a notice of the LLC formation in a local newspaper for several weeks.
  • It is much harder to transfer ownership in an LLC than in a corporation. With corporations, shares of stock can be sold easily. However, with LLCs, all owners must agree to transfer partial ownership to the new owner.
  • LLCs are much newer than other types of business structures. For that reasons, LLCs have less legal precedent when problems arise.

Explore Your Options

Numerous business owners select to operate an LLC since they know of the many benefits of operating this kind of business. You’ll still want to explore your options and determine if another business structure better suits the interest of your real estate business. As a small business owner, it makes the most sense to form an LLC as it is the simplest and most straightforward type of business model to operate. However, you will still need to do your research and understand the fees, filings, and licenses that are required for you to operate your real estate LLC.

Minimize Risks with the Right Strategy

Either way, you can minimize the risk by incorporating your real estate business. You can gain the trust of clients, financiers, and everyone if you incorporate your real estate business. But keep in mind these many benefits when determining which type of real estate structure to operate.

If you need assistance with your real estate LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel receives merely the top 5 percent of attorneys to its site. Attorneys on UpCounsel come from law schools all over the nation.