“Forming a real estate investment limited liability company (LLC) to purchase, own, and manage real estate is a smart business choice. Here is everything that you need to know about it and how Attorneys Real Estate Group can help you in the formation and setup of a real estate investment LLC and accomplish its many benefits.”
A real estate LLC is a limited liability company capable of buying, acquiring, and managing real estate. It is a legal body that is different from the individual investor. As a self-contained real estate holding company, real estate investment LLCs –
- can file their taxes with an Employer Identification Number (EIN);
- have their bank account; and
- offer personal liability insurance and tax benefits to the LLC owner.
LLCs may be created for a single real estate transaction or asset, or they can be used to hold a variety of real estate investment assets.
LLC for real estate agents means which types of LLC real estate agents use to conduct services in their institutes. The main objective of LLCs is to enhance the protection of the lawsuits of business activities, accidental commingling of funds, and debts. You can also choose from the LLC, LLC with S corp and C corp election, Partnership, Professional Association, and Professional LLC for these services.
The type of LLC you choose to conduct your business services will depend upon the nature of your business, the size of your business, and the preferred tax situation. The most popular LLC types among the real estate agents are Professional Association and Professional LLC.
Forming a Real Estate Investment LLC
Starting a real estate investment LLC has become increasingly common over the last decade. This is primarily due to the numerous advantages that come with it. Starting a real estate company is not challenging; rather, it is staying organised and doing your homework. The following is a short rundown of the measures that must be taken, which differ by state.
The first step for a real estate agent is the Formation of a real estate business. Most real estate agents try to fill 1099 forms for the tax return, whether as independent contractors, self-employed and working under a brokerage.
Among these real estate agents, the independent contractors have more responsibilities. But again, they also have many opportunities and freedom to achieve greater earning potential in return as well.
For example, suppose a house buyer and seller set a lawsuit against you. In that case you, as an independent contractor operating without a corporate structure, will be personally responsible for any loss or damage.
You can also lose your property and assets in this situation. However, this will not be possible if you have an LLC. Therefore, an independent contractor has more responsibilities and benefits as compared to salaried real estate agents.
1. Find out your state’s rules for forming a limited liability company
The fees and regulations for Real estate llc formation differ slightly from state to state, and they are subject to change. Most investors tend to incorporate in the state where they do business. It’s worth noting that if you conduct business or have a physical presence in different states, you’ll need to set up an international LLC in each of them. It is entirely up to you to choose a state; make sure to do your homework before getting started.
2. Choose a company name and search to make sure it doesn’t already exist
The importance of a good business name is more crucial than you may think. It must not only cater to prospective customers, but it must also be special to be registered as an LLC. Before going online to verify their availability, write down a few possible alternatives.
One of the most important things to remember when naming your company is to stop pigeonholing yourself. Because creating an LLC is just the beginning of your real estate career, pick a name that has potential. Double-check your list of candidates after you’ve narrowed it down to see if they’re already taken, which is the most popular reason why LLC applications are rejected.
3. File for an Article of Organization
The Articles of Organization of an LLC serve as the basis for the company. It generally includes –
- the primary address,
- name of the company,
- business owners,
- start date, and
- a summary of the business.
Before sending your Articles of Organization to the secretary of state’s office, make sure to double-check everything in it.
This is also the point when company owners must pay any fees connected to the LLC’s formation. If all things are submitted correctly, getting an approval shouldn’t be an issue. Still, the secretary of state’s office can take a few weeks to respond.
4. Draft an Operating Agreement with the limited liability company
Although not all states need an operating agreement, it is good to have one in your business plan. An operating agreement for an LLC simply sets three things.
First, how the company’s stakeholders can share the business. Second, how decisions will be taken. And third, it explains about what would happen if one of the company’s representatives wanted to leave.
One of the most important benefits of real estate investment llc formation is protecting from various unfavorable circumstances. An operating agreement follows the same logic: It protects corporate participants by predicting situations that might jeopardize its structure.
5. Check to see if your state needs you to print a notice of intent to file in the local newspaper
Typically, investors can place advertisements in a newspaper for three to six weeks. After that, the newspaper will give you an Affidavit of Printing, which you must apply to the secretary of state’s office.
6. Obtain the requisite permits, business licenses, and a tax identification number
In most cases, a real estate investment LLC isn’t the only designation you’ll need to start a company. Almost every state has its own set of licenses and permits which are necessary to obtain before doing business. For example, a general business license, sales tax permit, and technical license, etc. Again, a little online research will generally answer your questions about this part of the process.
Benefits that real estate investment LLCs provide to real estate agents
A real estate investment LLC provides other advantages as well beside the limited liability protection to real estate agents. Some of the advantages that real estate investment LLCs provide include:
1. Low audit risk
An LLC with an S corp election will more commonly provide you a lower audit risk, stated by Accounting Today. According to Accounting Today, only 0.22% of real estate agents with LLC with S corporation election was audited in 2018.
2. Tax flexibility
The real estate agents with LLC will take the S corp election with the IRS, saving the amount being spent on self-employment taxes.
3. Raising professional credibility
The main advantage is that by having this, the real estate agent will have a business or company name on his business card or contract, representing the agent more responsible and professional and getting more business. Home buying and selling is personal work and a large commitment so that the potential clients will look for someone professional. Therefore, the LLC set a perception in the client’s mind that the real estate agent is a professional agent.
4. Separating personal preferences and businesses
When a real estate agent has the LLC with his business bank account, the chances of personal liability are reduced. So the common mistake that the real estate agents make is using their finances in the business. For example, by charging business expenses on their credit card. To avoid this, the agents should have the LLC at the starting of their real estate businesses when they face the commingling of funds.
All these reasons and benefits show that LLC serves a great purpose in developing your real estate business. And the agents who do not set up LLC with their business bank account will do themselves a disservice.
Other considerations in real estate investment LLC business plan
After forming an LLC with a business bank account, a real estate agent can still consider several options to make more profit in his real estate career. The actions real estate agent take for more profit includes:
- Registering an employee identification number (EIN).
- Fill out IRS form 2533 to maximize the tax flexibility after getting an LLC with S corporation election with IRS.
- Create a business bank account for your business expenses to separate your finances and business finances and increase your credit rating.
- Have your new entity name and bank account by updating your W-9 form with the help of your broker.
- Change your real estate license to your LLC with the permission of your state.
- Ensure that you regularly check the board or regulatory commission that provides you the real estate license regarding any qualifications, restrictions, and fees to your LLC.
- Ensure the additional fillings and fees such as the annual report will a filing fee is necessary and the incorporation fees run from $40 to $550.
Also, if you want a solution to any problem about an LLC for real estate agents, you can post the details of your issue on the UpCounsel’s marketplace. The UpCounsel’s marketplace selection criteria will select only 5% of lawyers from law schools such as Yale and Harvard law and have a minimum experience of 14 years and work for or on behalf of someone in companies like Menlo Ventures Google, and Airbnb.
General case of LLC for the real estate agent
After going through the above-provided information, you can analyze why the LLC is beneficial for an investor in starting a real estate investment LLC. Let’s have a look at how this type of business structure will be beneficial for you.
Suppose a tenant slips in the main area of an apartment complex owned by you. He put a lawsuit against you because he gets severe injuries. Also, your insurance cannot remove all the penalties, and you still have to pay $300000 out of your finances.
So if you don’t have the apartment complex with the benefit of LLC, the tenant can force you to sell all your real estate and stop your wages, leading to bankruptcy. On the other hand by having an LLC, the regulatory authority will only force you to sell its real estate and can not force you to give away your primary real estate and assets.
Starting a real estate investment LLC, a right direction
Whereas forming a real estate investment LLC for a real estate agent is beneficial, it is important to consult with an LLC attorney before doing so. However, if you decide against hiring an LLC attorney and being on your own, start with Formation of LLC for business structure. This will ensure that you can answer all the questions pertaining to why you have to form an LLC. Also, if you want to get legal benefits and tax flexibility associated with the LLC, you will go in the right direction.
Where do you encounter problems?
When you try to buy real estate with an LLC, you feel difficulty because most residential lenders will not want to issue a loan for the real estate having an LLC. So when you face this situation, you obtain a commercial loan with shorter terms, higher rates, and increased fees.
This is why most investors change their real estate ownership into an LLC after owning the real estate. But this is a risk-taking business plan because if the lending institute finds out that you are changing your ownership in this context, it may inform the note due to a clause in the contract.
What should you name a real estate LLC?
If you opt for an LLC for real estate, you may not list the business on a website and include it in the marketing campaign. Suppose that the name of the LLC is not registered with the Secretary of State’s office, then, in that case, the name will be changed into the owner’s name.
Real Estate Attorney Near Me
As an investor, there are times when you can do it yourself, but not when it comes to legal or tax matters. The value of consulting an attorney and a tax adviser cannot be overstated since these knowledgeable practitioners can have the best guidance as we advance.
Our team has extensive knowledge and has worked with clients in all areas of real estate. We work hard to achieve the best possible result for our clients by considering their goals and conducting a thorough and objective analysis of the most effective way to achieve them.
Attorneys Real Estate Group will help you with any issue relating to establishing a real estate business including forming and setting up of a real estate investment LLC.
Simply, give us a call at 916-702-8443 or visit our website at Attorneysre.com. You can also get free legal consultation by filling in the form at this link. One of our attorneys will get back to you as quickly as possible and will be glad to assist you. We look forward to welcoming you soon.