One way for contractors to cultivate wealth is by developing a broad portfolio of real estate investments. While real estate can certainly be lucrative, it’s also important to remember that real estate can be risky. As such, contractors and other investors will want to take smart precautions to mediate risk and to ensure their portfolio is positioned for long-term success.
An effective way to do this is by registering as a Limited Liability Company, or LLC. LLCs have been around since the 1970s, and while they are popular across virtually all industries and verticals, they may be especially useful for real estate investment.
LLCs at a Glance
What is an LLC, exactly? Essentially, registering as an LLC allows you to establish your business as its own legal entity, with discrete assets and liabilities. To put it differently, registering an LLC allows you to separate your business finances from your personal finances, and to limit your own legal liability in issues involving the business.
More specifically, an LLC offers the assurance that, if your business venture is hit with a lawsuit or runs up enormous debts, your personal and familial assets are off the table. As such, you can invest in your business confidently, knowing that you have some personal wealth protections in place. For those entering the unpredictable world of real estate investment, such protections can be invaluable.
Why LLCs Make Sense for Real Estate Investors
Beyond personal wealth protection, there are several other ways in which registering as an LLC can enrich your real estate investments.
Taxation on a Pass-Through Basis
LLCs are generally taxed as pass-through entities, which just means that profits and losses of the LLC “pass through” to the owners’ personal tax returns. This allows investors to sidestep the double taxation that occurs with corporations.
Other Tax Advantages
Real estate investors can take advantage of a wide range of tax deductions related to property ownership, including deductions for mortgage interest, property taxes, depreciation, and maintenance expenses. All of this helps to reduce taxable income.
Flexibility in Management Structure
Another benefit of registering an LLC is that it’s pretty easy to manage. In fact, LLCs may be managed by the owners or by appointed managers and third-party companies. This flexibility allows contractors to be as involved or as hands-off with their real estate investments as they care to be.
Credibility and Professionalism
Operating real estate investments through an LLC can add a layer of professional credibility. Simply put, it established the real estate venture as a “real” business, not a side hustle. This can be beneficial when dealing with tenants, partners, lenders, and other stakeholders.
Ability to Raise Capital
Along the same lines, registering as an LLC makes it easier for real estate investors to raise capital from various investors. And, by pooling funds through their LLC structure, investors can collectively purchase properties, allocating the financial risk among multiple participants.
Asset Protection
Even above and beyond personal liability protections, LLCs offer important safeguards for real estate investors. By holding each individual property in a separate LLC, investors can isolate potential risks, reducing the impact of legal issues or financial difficulties on their broader investment portfolio.
Forming a Real Estate LLC: Tips and Guidelines
To take advantage of these many benefits, there are just a few administrative steps required. While the LLC registration process may look a bit different from state to state, the general protocol goes something like this.
Registering in the Right State
As a rule of thumb, you typically want to register your LLC in whichever state you’re generating income. For real estate investors, that means registering in whichever state or states your investment properties are held.
Choosing a Name
You’ll need to decide on a name for your LLC, which can be pretty much anything so long as it’s not already taken by another LLC in the same state. Most states have searchable directories, allowing you to confirm the name you want is still available.
Picking a Registered Agent
Every LLC is required to have a Registered Agent, someone who receives legal and tax documents on the business’ behalf. Generally speaking, you’ll want to outsource this; check for the best LLC service for your company.
Creating an Operating Agreement
Your Operating Agreement is basically like a charter, stipulating how your LLC will be managed. This document can be important for averting legal disputes down the road, especially if you’re working with investment partners.
File Articles of Organization
Your Articles of Organization officially create the LLC as its own legal entity. You’ll need to file this document with your state, and also pay the state’s LLC registration fee. This is different from one state to the next.
Claim an Employer Identification Number
Before tax time, you’ll need to ensure your LLC is set up with its own EIN. You can request one for free from the IRS.
Use an LLC to Build Real Wealth
Contractors and other real estate investors can use LLCs to protect their personal assets from potential lawsuits or debts incurred by the property. An LLC provides a legal barrier between personal and business assets, shielding the investor’s savings, home, and other valuables from being targeted in litigation or other financial woes. What’s more, an LLC offers tax advantages, flexibility in management, and credibility with lenders and partners.
The bottom line: By structuring investments through an LLC, investors gain peace of mind, asset protection, and a strategic framework for managing their investment portfolios.
Author Bio
Amanda E. Clark writes for LLC University and has been featured as an expert on panels discussing content and social media marketing.
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