Real Estate: Why Investors Like The LLC Structure

Those entering the world of real estate are faced with multiple options when it comes to choosing a corporate structure for their new business. However, because the new business owner is involved in the real estate industry, one type of entity should stand out as the clear favorite. In real estate, investors strongly prefer the LLC structure.

Unlike sole proprietorships or partnerships, one of the most significant reasons why real estate investors prefer the Limited Liability Company structure is because, upon filing, the business serves as its own legal entity. Although the investor, or team of investors, make up the ownership and membership groups, they completely protect themselves from liabilities and debt upon establishing the LLC.

This is especially vital for investors, as they always run the risk of not being able to make payments. If an investor were ever to go defunct, their personal assets would not be at risk. Only the assets of the LLC would be at risk, which is a huge perk for real estate investors. When an investor owns a building, they also subject themselves to lawsuits from disgruntled tenants and tenant guests. They also put themselves at risk for accidents, such as slip-and-fall injuries or fires. Ensuring that the owners are protected from these lawsuits is one of the biggest reasons why real estate investors prefer the LLC structure.

Additionally, once owners form an LLC, they will likely be able to open a business bank account and file its own taxes. One of the biggest benefits of this is the fact that investors will be able to secure a business line of credit. Their personal credit line will not be impacted were anything to go wrong with an investment, therefore ensuring that their family’s future is protected.

When filing taxes, real estate LLC owners can write off all expenses and losses on their business’ tax forms because the company is its own entity. A bigger benefit, however, is the fact that after deducting the expenses and losses, real estate investors in an LLC structure have the option to pass their income through to their personal tax returns.

This is not mandatory. But, it could serve as beneficial depending on the individual’s personal tax rate and their corporate tax rate. If the corporate tax rate is less than their personal tax rate, business owners would be wise to tax the earnings at the corporate rate. But if the personal tax rate is less than the corporate rate, business owners should take advantage of the fact that they can pass through the income to their personal returns for the year. Whether an investor chooses to take advantage of this can depend based on his or her individual situation. An accountant will be able to provide better advice as to which option is best.

Another reason why the LLC structure is well-known among real estate investors is that it’s easy to grow the business. This is particularly important in investment real estate when an opportunity can arise quickly. If an opportunity were to emerge in a neighboring state, investors must act fast to take advantage of the offer. However, to do so, they must be authorized to conduct business in that state.

It’s far easier for an LLC to receive permission to transact business in a state than it is for a corporation to obtain such approval. Odds are, the real estate investor would file as a domestic LLC in the state in which they primarily plan to conduct business. Then, if they were to expand their operations, the company would then register as a foreign LLC with the neighboring state. Registering as a corporation can be time-consuming and rigorous, as the state will likely require board members to meet on an annual basis, among other strict requirements. Businesses operating under the LLC structure will not face such rigorous standards.

However, it’s also important to note that real estate investors may need to secure licenses before conducting business in a state. This is separate from the LLC structure. Meaning, it may be relatively easy for real estate investors to file as a foreign LLC, but this does not mean that they can then immediately begin conducting business in that state. Instead, the real estate agent will likely have to pass examinations or licensing requirements, much as a lawyer must pass the bar examination before practicing law. These requirements may vary from state to state, so it’s crucial that investors look into these requirements before assuming they’ll be allowed to begin operations.

Those involved with real estate know how crucial it is to work together as a team. The more team members working on a project, the more money and capital there is available to invest. The more money that’s available to spend, the bigger the contracts the group can secure. By filing as an LLC, real estate investors make it easy to invite other investors onto their team.

The business will be attractive to other investors, who appreciate the fact that they are buying into an LLC, thus protecting their personal assets. And, it’s easy to add members to an LLC group. Real estate investors can do so by merely filing paperwork with their Secretary of State’s office.

Those filing as a corporation face strict requirements when it comes to outlining how the company plans to distribute profits. However, real estate investors who have registered under the LLC structure are afforded tremendous flexibility when distributing their earnings. For example, in an S Corporation, profit distributions must be pro-rated based on ownership. However, those involved with an LLC structure can elect to distribute cash flows as they see fit. This could change from year to year depending on how much an investor puts into the company.

Additionally, if some investors provide capital while others are going from site to site interviewing owners and brokering deals, the LLC owners may wish to pay the hardest workers more of the earnings. This is possible under an LLC. Real estate investors can distribute their profits and revenues however they see fit under the LLC structure.

As a real estate investor, you are likely concerned about other aspects of your business, such as buying and selling properties. Fortunately, DoMyLLC is here to help you handle the administrative side of things. From serving as your registered agent to helping you through the filing process, DoMyLLC is the expert you need.