Real estate has for years been among the most profitable industries. According to a New York State Comptroller's Office, over 20 percent of American millionaires got their wealth from the industry.
But just as the industry is profitable, it involves taking huge risks which can put your personal property at risk. One effective way of protecting yourself is by registering your business as a limited liability company (LLC).
But there are more reasons you would want to register your business as an LLC. This guide explores these reasons, so keep reading to learn more.
But What Is An LLC?
An LLC is a legal entity or business structure offering the best of a corporation, partnership, and sole proprietorship. An LLC can be single-person owned or have several owners, known as LLC members.
Members of an LLC have different roles as outlined in the LLC operating agreement. Traditionally you would need to have a lawyer help you create one. Today you can build your own LLC agreement by leveraging online templates, and it will be as legally binding as the agreement you create with a lawyer but for free.
Benefits of Placing Your Real Estate Business into an LLC
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Liability Protection
Running a real estate business as a sole proprietor is pretty straightforward because you may not need to be thorough in creating a formal business structure which can involve significant paperwork. Conversely, a sole proprietorship doesn't offer liability protection, meaning you risk losing personal property should your business become liable.
An LLC, on the other hand, separates business and personal assets. Separate assets mean that your assets have some protection against losses incurred by your business. For example, if you take a mortgage under an LLC and cannot service the loan for some reason, the lender cannot sell your personal property to recover the loan.
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Tax Benefits
Most business people do not run their businesses as a corporation or an LLC. From a tax standpoint, you will be better off running a business as an LLC than as a corporation.
Unlike corporations, LLCs do not pay federal taxes on a business level. Instead, LLCs enjoy pass-through taxation like sole proprietorships, where individual members are taxed based on their income from the LLC, thereby avoiding double taxation, as is the case with corporations.
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Professional Appearances
When doing business, appearances matter a lot. Whether soliciting customers, making business deals, or even seeking funding for projects, the people you deal with will consider a corporation or an LLC more legitimate than sole proprietorships.
If you want to close better deals or increase other people's trust in your business, you have to consider putting your real estate business into an LLC. It doesn't matter if you are the only person in the LLC; other entities will still consider your business more legitimate if it's an LLC.
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Easier Exit Strategy
If you want to exit the real industry, the process can be extremely complicated when running your business as a sole proprietorship. You have to process all the assets individually, paying legal, taxes, and official fees for every transaction.
When exiting from an LLC, on the other hand, you only need to transfer ownership of the LLC and have all the properties registered under the LLC change ownership. This also applies when disposing of individual properties registered as an LLC rather than having all your properties under one LLC.
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Anonymity Benefits
If you prefer keeping a low profile, registering your real estate as an LLC helps you retain some form of anonymity in a way a sole proprietorship can't. All properties owned by an LLC will have the LLCs name in their documentation, even when you are the sole owner of the LLC.
You only have to ensure your name is not part of the LLC's name. If you do not want your address on the documentation as an additional privacy perk, you can list your registered agent's number as your address for all correspondence.
Limitations of an LLC
Putting your real estate business into an LLC has huge benefits. But it also has its downsides, such as the complexity and the costs involved in setting up one. Also, protection from liability doesn't always mean that you cannot be held personally responsible for your misdeeds.
For example, if you are a guarantor for a mortgage taken by your LLC, a lender could find legal means of coming for your property. Also, you can be held personally responsible for incidents that result from your failure to uphold your duty as a property owner if the failure results in damages.
