What does LLC mean in real estate? Know the advantages and pitfalls of forming an LLC for your real estate business.

Real Estate As an LLC

Setting up real estate firms as an LLC is not a new trend. The protection and ease of business that LLCs provide make them one of the easiest ventures to start your business with. They protect the owners not only from external perils of business, but also from their own decisions that might turn out to be not so good for the business.

Starting an LLC might look like a daunting task if you are venturing into it for the first time. However, going through the entire formation procedure acquaints you with the legal framework your business is based upon.

Real estate investors prefer LLCs to other forms of business primarily because of the protection features an LLC offers. It never hurts to consider an LLC as an option while planning out your business.

The Advantages of LLC For a Real Estate Venture

  • Distinct legal entity: An LLC is a separate legal entity. It is entitled to a separate tax identification number and bank accounts. It can perform business transactions under its own name.
  • No personal liability: The members responsible for day-to-day operations of the business can't be held liable for debts, loans, and other obligations of the company.
  • Tax relief and ease of business: Despite being a relatively new business structure (introduced in 1977), LLCs have been widely accepted as one of the most business-friendly structures out there. In addition to offering protection from personal risk, LLCs also provide significant tax relief and ease of administration.
  • Better than a liability policy: A liability insurance policy may help you protect your personal assets, but all liability policies have exceptions and limits. If any of the liabilities fall beyond the scope of your insurance coverage, it can spell doom for the business. Thus, LLCs are much more trustworthy than business liability insurance.

Although it can be argued that paperwork and the process involved in setting up an LLC may be cumbersome, the safety and security that an LLC provides to the owners' personal assets should be a good enough reason to pursue it nevertheless.

Tax Treatment of LLCs

The IRS does not have a separate taxation category for LLCs. An LLC can choose to file its taxes as a sole-proprietorship, a partnership, or a corporation.

If a single individual sets up an LLC, it is considered separate from the person. However, it may still have to file its taxes as a sole-proprietorship. Similarly, LLCs with more than one member are treated like a partnership firm for the purpose of taxation. However, the owners can elect for corporate taxation by filing Form 8832 with the IRS.

LLC For Investors

LLCs offer the same level of liability protection as that offered by S corporations and C corporations. However, investors are generally apprehensive to invest in LLCs because they are considered to be less stable. You may still be able to attract investors, but it would require more efforts to convince them that the business is, in fact, stable and there to stay.

Things to Consider While Forming a Real Estate LLC

  • You should form an LLC from the very beginning of your real estate enterprise, even before you acquire any initial investment so that you can separate yourself from the business.
  • Since the protection offered by an LLC varies from state to state, you should familiarize yourself with the laws of your state before embarking upon a business expedition.
  • You should choose the right LLC structure for your business, especially for the purpose of taxation. Otherwise, you may fail to take full advantage of all the tax breaks available to you.
  • Fraudulent activities and malpractices can easily nullify your limited liability protection. Avoid mixing up your personal funds with those of business; it may make it difficult for you to prove that the LLC is a separate entity and make you liable for the company's debts.

An LLC can be extremely helpful in the real estate sector if you form and operate it in a fair manner with complete knowledge of the formalities involved. Seek professional advice if you are not sure if an LLC is the right type of structure for your business.

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