Buying Property with an LLC
If you are wanting to start investing in real estate, you would know that it is rarely as simple as purchasing a property to receive rental income. Here are some tips to buy property with an LLC.
There are options available to make the real estate process easier and safer for all.
You may have read about the rise in popularity for purchasing real estate investment properties under a trust. But have you considered using a limited liability company (LLC)? Many will consider purchasing a property with an LLC to be a good alternative to using a trust, and we will go into further detail below.
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What is a Limited Liability Company (LLC)?
It is no secret that while there are many benefits to investing in real estate, it comes with its risks. And one of the larger risks is in the form of increased liability. One of the best ways of protecting your assets from your new investment is by forming a limited liability company (LLC) for the purchase of a property or business.
Investopedia describes an LLC as being an entity that is formed purely for the purpose of separating an investors personal asset from their business assets. They can be owned solely or partially. They also do not come with the complexities that a standard company carries (such as needing a board of directors). The LLC exists to be the buffer between you and the property that is falls under.
When and How Can an LLC Protect You?
There are a lot of things that can go wrong when you invest in real estate. And often the consequences for these are financial. There is no reason why a bit of bad luck with your property should send you to financial ruin. So, if any debts are incurred from your investment property, your personal assets cannot be seized to pay them off. You and your assets are protected.
Of course, there are limitations to what and when it can protect you and your assets. You will not be covered for any illegal activities with your LLC. It also needs to be an investment (a source of business), rather than being used for personal reasons. There are also certain taxes and fees that need to be paid periodically.’
Pros and Cons of Buying a Property with an LLC
The main benefit of purchasing a property as an LLC is in the name – limited liability. But what are some of the additional pros and cons, when compared to purchasing a property as an individual? Source: Legalzoom.
- Limited liability. Any debts incurred through your property do not extend to your personal assets.
- Less limitations and less costly than many forms of liability insurance.
- LLC would be named in any lawsuits regarding the property. The property owners personal name would not be exposed.
- No LLC tax. Owners can avoid being double taxed on rental income and appreciation of property.
- Additional (and often large) upfront cost when purchasing a property.
- Extra paperwork and organization. Personal business needs to be kept separate from LLC business.
- Can be a loss of control if there is more than one owner of the LLC.
- Loss of privacy. Documentation needs to be submitted to the government, so information will be subject to public disclosure.
While there may appear to be as many cons as there are pros, when you consider the severity of the potential consequences of not purchasing under an LLC, you can see why so many people are using them. It could be the difference between keeping and losing your property. It could also be the sole factor stopping you from going bankrupt if an incident were to occur.
What is the Process with Starting an LLC?
The exact process and cost for starting an LLC varies by state. So, if this is something that you will be interested in doing, then you will need to research your individual state’s regulations and requirements. You will also need to choose a business name. Fortunebuilders recommends making it something separate from your personal identity.
An important step is to meet all the state requirements and fees, and make sure you file all the necessary paperwork promptly. You will need business licenses and permits, and to create a tax identification number through the IRS.
What are the Common LLC Mistakes?
There are some common mistakes that are made when it comes to creating an LLC, and they mainly involve omitting proper steps in setup. The setup can be intimidating. However, it is essential that your LLC is set up properly before you purchase a property for you to be properly covered. You also need to be aware of the tax implications to avoid issues with the IRS.
Establishing an LLC is only the first step. One dangerous mistake can occur after the property has been purchased, and it comes from thinking that the LLC makes you invincible. Being protected by limited liability does not mean that you are immune to prosecution – you still have legal obligations to the government and any tenants in your properties. You must follow laws and act in a manner that is ethical.
Due diligence is key when setting up something like an LLC, and it is imperative that you take the time to thoroughly investigate the requirements and ensure that everything is set up properly. Otherwise, the main benefits of having the limited liability will not exist.
Investing in real estate can be an exciting adventure and result in fortune and goodwill. It can also backfire and end you up in a world of hurt. So, it is a good idea to look at options for protecting yourself when considering a real estate investment (whether it be residential or business). A Limited Liability Company is fairly straight forward to set up and maintain and could be the difference between success and failure in the real estate world.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.