“Forming a real estate limited liability company (LLCs) to manage your real estate portfolio has clear-cut benefits. It separates its owners’ personal assets and liabilities from that of the LLC as well as offers tax incentives. This article covers aspects of how a real estate LLC attorney can help you in its formation and management.”
Real estate limited liability company (LLCs) attorneys are in high demand nowadays. And the reason for this is simple. More and more real estate investors are becoming aware of the benefits that a real estate LLC offers. So, in case you searched for a ‘real estate LLC formation attorney near me’, this is the place.
This page discusses everything important in forming a real estate LLC and how a real estate LLC attorney can help you in this regard.
So, let’s begin.
What is a limited liability company (LLCs)?
‘LLC’ stands for ‘Limited Liability Company’. An LLC is a form of a business structure whose main purpose is to protect and not expose its owner’s personal assets and belongings to pay off the LLC’s debts and liabilities.
The simplest way to explain this is that an LLC is a legal entity with a separate identity from its owners. Owners of an LLC are commonly known as members.
Being a separate entity and having its own identification, an LLC is completely liable for any debts and losses it incurs. A member’s liability is only limited to the extent of its ownership interest in the LLC.
A limited liability company (LLCs) could conduct almost any type of business. The only exceptions that exist in this case are those specifically mentioned in the federal and state laws. For example, the IRS restricts the banking and insurance businesses from being formed as a limited liability company (LLCs).
The most distinguishing feature of forming a limited liability company (LLCs) is a set of certain characteristics that it holds. Although these characteristics separately exist in each of the other types of business structures, they are combinedly present into an LLC alone.
Main advantages of forming a limited liability company (LLCs)
Although there are several clear advantages of choosing to form an LLC over other legal entities, the three main advantages are –
- Preventing owners from being held responsible to pay off any debts, liabilities, or losses incurred by the LLC.
- Providing tax advantages such as avoiding ‘double taxation’ as well as the freedom to classify itself as any other entity type for the purpose of taxation.
- Easy to set up, manage, and brings proper structure to conduct any business.
A detailed discussion on the advantages and disadvantages of forming an LLC is available in the sections below.
Benefits of forming a limited liability company (LLCs) for real estate purposes – Pros and Cons
The economics principle of land scarcity has always maintained the real estate business’s status as a lucrative option for many investors. However, besides offering many perks, the real estate business is also no stranger to having a few risks as well.
Therefore, in addition to having many benefits, an LLC formed to hold and conduct real estate has a few downsides as well.
In this section, we discuss all the pros and cons of forming a real estate limited liability company (LLCs).
Benefits or Pros of forming a real estate limited liability company (LLCs)
1. Putting limitations on owners’ personal liability
The statutory laws and state regulations acknowledge an LLC as a separate entity from its owners. As per the law, LLCs are quite similar to any other corporation or natural person.
Simply put, an LLC has full capability and capacity to take all actions deemed necessary to conduct and manage its real estate business. It can enter real estate contracts of sale, purchase, and rent on its own behalf with another LLC, corporation, and/or natural person.
Apparently, these transactions will either result in profits or losses for the real estate LLC. How an LLC decides to share its profits or pay off any debts are two separate things.
An LLC’s members decide matters such as sharing, distribution, reinvestment, etc. of profits earned. Apart from this, the LLC’s operating agreement may also specify the manner of dealing with such issues. The operating agreement is a key document created at the time of the LLC’s formation. It outlines policies on important matters concerning the day-to-day affairs of an LLC.
In the case of losses, LLCs must usually bear them alone. Yet exceptions do exist. In rare circumstances, LLC members might need to either partially or completely absorb some liability.
Any debts, liabilities, or losses incurred must be only paid out of its profits, funds, and assets or properties that it owns. Generally, members personally remain protected. They don’t face exposure to compensate the creditors of the LLC.
This pretty much explains the concept of limited liability. The liability of the members of an LLC is only limited to a certain extent and nothing beyond. This extent is basically defined by the amount of their investment or ownership interest in the LLC.
In the worst case, the maximum that could happen is the members getting nothing from their investment in the LLC.
2. Business identification and recognition
On many occasions, having a business name and identification helps a lot. This means that operating as an individual and operating as a structured business entity isn’t the same.
An established business is more likely to get attention, gain client’s trust, expand operations, and derive more sales. It does not matter even if you are an owner-operator as can be the case of a single-member LLC.
Introducing your business as a separate and distinguished entity is a key to success in most cases.
3. Limited liability company (LLCs) can raise capital and investment
LLCs, like any other corporation, could easily raise investment and capital by adding more members to it. Since there isn’t any limitation on the maximum number of persons that can become a member of an LLC, existing members can bring in new members for raising further investment.
4. Simple to form and operate
While hiring a real estate LLC attorney for LLC formation is mostly recommended, the formation criteria itself are simple. It usually does not involve a lot of paperwork and avoids many complexities that otherwise exist in making a corporation.
Similarly, operating an LLC also does not require many conditions as are present in the case of a corporation. An LLC is free from many forms of administrative responsibilities and obligations that need to be precisely followed by corporations.
Things like appointing officers, having directors, and conducting board and shareholders (members) meetings aren’t necessary.
5. Easy to manage
It is also quite easy to manage the affairs of a limited liability company (LLCs). There aren’t any conditions on the minimum or the maximum number of members that an LLC can have. In addition to this, members can either manage all the affairs of the LLC on their own or can even appoint managers for this purpose.
There is also no specific condition as to the appointment of managers of a limited liability company (LLCs). Members and non-members both can serve as managers to run a limited liability company (LLCs).
6. Ease of continuity and transfer
Unlike a partnership firm, an LLC does not need a dissolution when there is a change in its existing members. This means that an LLC can continue to operate under normal conditions irrespective of the fact that any member leaves or dies, or new members join in.
However, this is only possible in the presence of a business continuation agreement. In the absence of such an agreement, an LLC will have to be first dissolved and then formed again.
Similarly, an LLC can be sold without this affecting its business functions as per the provisions of its operating agreement. An LLC’s operating agreement generally includes an extensive account of the matters with regards to the transfer of ownership. These include –
- Changes in the percentage of ownership interest,
- Change of a member’s name,
- Existing members selling their shares to new members, etc.
An ambiguity might exist in such matters, if not clearly mentioned in an LLC’s operating agreement. This could lead to an unwanted and untimely dissolution of the limited liability company (LLCs). For such reasons, therefore, it is highly recommended to hire a real estate LLC lawyer.
An expert real estate LLC attorney can easily assemble all important matters at the time of an LLC’s formation. This will help the limited liability company (LLCs) to continue its business in a normal manner even during its ownership transfer.
7. Tax benefits under an LLC
Although we are mentioning this lastly, obtaining tax benefit is unquestionably the second most important reason for forming an LLC.
Tax matters always pose great concern for business owners as it affects their profitability, income, and business operations. However, a limited liability company (LLCs) on the other hand have several tax advantages.
The choice available to members of an LLC to decide the mode of being taxed is perhaps the biggest advantage.
Remember that the Internal Revenue Service or IRS does not specifically mention any tax classification for LLCs. This means that a limited liability company (LLCs) is free to choose between being taxed as either of the following –
- Sole proprietorship;
- C Corporation; or
- S Corporation.
However, deciding between the above depends on the number of members in an LLC.
A single-member LLC has the option to choose between a sole proprietorship, partnership, and a C corporation. In any other case, where an LLC has more than one member, all the above options except the sole proprietorship are available.
A brief summary on deciding the best-taxed option for an LLC is present at a later point in this article.
Cons of forming a real estate LLC
Although the disadvantages of forming an LLC are nothing in comparison to the benefits that it offers, they still require consideration.
1. ‘Due On Sale’ clause
If a mortgaged property transfers on sale to an LLC, there are chances that it may be violating the ‘due on sale’ clause. The ‘due on sale’ clause is a standard section in many mortgage agreements.
According to this clause, the full payment of the remaining mortgage amount becomes payable at the time of sale of a mortgaged property.
To ensure that no violations occur in such transactions, hiring a real estate LLC attorney can be helpful.
2. Transfer tax issues
Depending on the state where the LLC’s formation happened, transfer taxes may apply when an individual transfers ownership to an LLC. However, exceptions to this rule may also exist in your state.
For instance, in ownership transfers where the ownership interest remains the same after the transfer as it was before, no transfer taxes may be applicable.
Consult one of our expert real estate LLC attorneys near me to understand better the applicability and scope of transfer taxes in your case.
How to decide the best-taxed option for your limited liability company (LLCs)?
To obtain maximum tax advantage and avoid any errors, hiring a real estate LLC attorney should be the preferred choice. A real estate LLC formation attorney will help you understand important issues and decide the best option for you. Such matters related to a limited liability company (LLCs) taxation that a real estate LLC lawyer will help you with are –
1. Tax rates
Different tax rates apply to different forms of business structures. But since the IRS provides an LLC to decide for itself, there is an option to choose between a ‘disregarded entity’ and a corporation.
Although an LLC means a separate entity from its owners, for tax purposes it can be as well considered a sole proprietorship. By disregarding a limited liability company (LLCs) as a separate entity, its members can treat its income as their personal income. This is also known as ‘pass-through taxation’ and helps in simplifying the tax return of the members.
Contrary to this, the members can also decide to adopt the corporation treatment for tax purposes. In such a case, the LLC’s income becomes taxable at the prevailing corporate tax rates first before passing on to the members. This income then will be again taxed as the personal income of members, which usually happens for members of a corporation.
2. Double taxation
The above discussed corporate tax treatment in the case of a limited liability company (LLCs) is also known as ‘Double Taxation’. A limited liability company (LLCs) has the freedom to avoid double taxation by not adopting the corporate tax treatment.
3. Deductions allowed on capital expenditures
All and any expenditure incurred by a real estate LLC that classifies as capital expenditure is allowable for the deduction. As per the IRS provisions, capital expenditures aren’t deductible immediately from the profits in the year of occurrence. Rather, their deduction should spread over several years, which usually comprise of an asset’s useful life.
4. Deductions allowed on business expenses
Several forms of business expenses are allowable for deduction from the profits of the limited liability company (LLCs). Members cab divide such expenses according to the percentage of their ownership in the LLC or as mentioned in the LLCs operating agreement.
What business expenses are allowable or not as deductions depend on the tax treatment chosen by the members of an LLC.
Instances where a limited liability company (LLCs) member may become personally liable
Despite being an LLC, in some cases, the owners may become personally liable to pay off the creditors of their LLC. This includes both voluntary and involuntary actions on their behalf. Examples of situations where this might happen are –
Becoming voluntarily liable
- Where an owner voluntarily on personal behalf cosigns an agreement, such as to obtain a loan for the LLC. In such a case, the member of the LLC is now personally liable to pay back the loan if the LLC defaults.
- Where an LLC member voluntarily provides any personal guarantee to fulfill any obligation due to an LLC. Should the LLC become unable to fulfill any such obligation, the member providing the guarantee will be held personally liable.
- Where the member voluntarily pledges any personal asset or property to obtain a loan for the sole purpose of the LLC, he extends his personal liability.
Becoming involuntarily liable
- An LLC member may involuntarily become personally liable in certain court matters. This is also known as ‘piercing the corporate veil’. In this, the creditors need to prove that the LLC and its members were practically not operating as separate persons. This means that the main purpose of forming an LLC was actually compromised.
- Another instance of incurring involuntary personal liability arises when the members of an LLC are found to have committed fraud. Making false or fraudulent representations or omitting necessary information while making any important disclosures can create personal liability issues for an LLC’s members.
Real estate LLC formation attorney near me
While you can hire a real estate attorney to help you with your real estate matters, a real estate LLC formation attorney near me can do better. He can, from the very beginning, structure your real estate limited liability company (LLCs) in such a manner that protects you from any kind of unwanted liability or ambiguity in managing your real estate LLC.
Luckily for you, Attorneys Real Estate Group specializes in providing both real estate lawyers and real estate LLC attorneys. Our team of real estate LLC attorneys is professionally competent to assist you at every step of forming an LLC. From your real estate LLC’s formation to providing help in deciding its various affairs, our real estate LLC attorneys are experts in everything.
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.