Purchasing real estate under the umbrella of an LLC provides the investor with much needed protection for themselves. The protection alone is pivotal for investors to reduce the amount of risk associated with real estate investing. This is crucial for investors to shield their finances from potential legal actions. For instance, if you or a member fail to make payments on a loan for the property and the debt is in the LLC’s name, you would not have to risk wiping out your personal assets to satisfy the remaining loan and creditors will not be able to seek payment from other members in the LLC.
A Limited Liability Company (LLC) is known as a ‘pass through entity’ because they are exempt from paying corporate taxes. Meaning all proceeds of the company are used to pay debts and are then distributed accordingly to its members to pay individual taxes on. Members can then write off the LLC in their taxes as a profit or loss in their personal income. Additionally, if your LLC is used for managing rental properties, you may be eligible for an additional personal income tax deduction. When deciding on the distribution of the companies proceeds, LLCs offer a flexible business structure to apportion appropriately.
To properly structure an LLC, investors use what is known as an Operating Agreement.
Operating Agreements allow the company to set, for each member, a framework to accommodate for each other and to distribute ownership. Setting up operating agreements is only required depending on the state in which the entity has been formed. These can be referenced when needing to resolve problems or disputes that could occur within the company. Unlike Operating Agreements, Articles of Organization must be filed to legally establish the entity with the state. Together they are the framework for your Real Estate LLC.
While purchasing real estate without the protective vail of a limited liability company is legally possible it is deemed unwise. Investors might find that the strategic choice of real estate management through an LLC is a crucial step into the real estate market. With the major advantage of highly mitigating financial risk, tax advantages and asset protection investors can leverage their LLC to venture through the unprecedented world of real estate investing.
