What You Should Know About Forming an LLC

LLCs: Should you, shouldn’t you, when is best, what will its formation do for you—these are just a few of the questions real estate investors have when I broach the subject of forming a limited liability company, or LLC. To make things a bit easier, I’ve decided to compile all the important information you need to know about LLCs for real estate investing, and answer everyone’s burning questions.

First, let’s break down just what an LLC is: a limited liability company is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a company. Tax benefits and limited liability—sign me up!

Now, there are two trains of thought regarding forming a limited liability company. On the one hand, beginning your real estate venture by structuring your real estate business under an LLC mitigates your risk, and protects you and your personal assets from debt collectors should your investment business go up in smoke. By forming a limited liability company beforehand, you can increase your liability coverage amount, should accidents or injuries occur in your properties, and it also sets the ceiling of your out-of-pocket loss, after exhausting your insurance, for liability cases at the amount of equity you have in your LLC. Being cautious and making smart choices are certainly great ways to keep your business rolling down the path of success.

But, on the other hand, there may be some real estate investing folks out there who are looking for a great deal on financing terms. Personal borrowers can often negotiate better financing terms than an LLC can. But, this is because a lending institution knows that you will be personally liable for that debt—meaning that, should you be unable to pay the loan back, they can go after you and much of what you own to collect what they are due. That’s an unsettling prospect for most people. If you choose not to take advantage of the better financing terms you may receive as a personal borrower by forming a limited liability company first, you protect yourself from being personally liable to repay the debt in event of foreclosure—and, knowing that 7% of loans foreclosed between 2004 and 2014, it is a real concern. Of course, whether you choose to form an LLC first or after you acquire property is up to you, and dependent on your unique situation—but personally, I believe forming a limited liability company first is more advantageous.

If you didn’t see this article before purchasing property, and would now like to transfer that property to your newly formed LLC, limiting your personal liability, you can do so through a quitclaim deed. If you’re going to do this, be sure to review your mortgage documents with the help of your attorney to ensure that you are not in violation of a Due on Sale Clause—cross all your T’s and dot all your I’s, as they say.

So, we’ve already touched on why an LLC for real estate investing is advantageous, but in case you don’t believe me, or still don’t quite see the value, let me throw a few statistics at you that highlight the benefits. For starters, anywhere from 36-53% of small businesses—including real estate investors—find themselves involved in litigation in any given year. If you become a figure in this unfortunate statistic, but have formed an LLC, you and any other owners can only be sued within the constraints of what the LLC owns. Also know that the median and average premises liability verdict is approximately $98,160 and $643,099, respectively—those are some hefty figures! You don’t want to be personally on the hook for that amount, and with the forming of a limited liability company, you won’t be.

To make matters worse, 6% of premises liability cases involve punitive and actual damages—so, you might be paying out for real damages and money to punish you for any egregious wrongdoing—ouch. If the liability case happens to be one of the 5% that involve a wrongful death, those punitive and actual damages can be quite expensive.

Real estate investment is often about making big and bold moves, but that doesn’t mean you need to act recklessly—protect yourself and form an LLC for real estate investing. Need assistance and guidance in forming an LLC? No problem! I have the experience and real estate-savvy you need to make the right choices—contact us today to discuss how we can help you.

About Brandon Hall

As founder and CEO of The Real Estate CPA, Brandon is primarily focused on growing a CPA firm that provides real estate clients with an awesome experience. Brandon leverages his personal real estate investing and his Big 4 Accounting experience to offer unique insights to his clients. Brandon enjoys CrossFit and Kiteboarding when he's not crunching numbers.

6 Comments

  1. Tyrone on January 30, 2018 at 10:57 pm

    Great article Brandon, I’m planning to buy a multifamily home and live in one unit and rent the other. Do you think buying the property under an LLC would be a good idea in that case?

    • Brandon Hall on January 31, 2018 at 5:56 pm

      I’d check with an attorney on this one. From a tax perspective, it won’t help.

  2. Tim on February 13, 2018 at 9:31 pm

    Hi Brandon,

    I have had no luck in getting a mortgage loan through my LLC. Lenders insist on it being in my name personally. I had set up an LLC, and checking accounts through the LLC, that I will have to close and open new personal accounts for each rental (I have 4 duplexes right now) to handle my investment properties. I tried to do everything right, but it seems there is a disconnect between all the various “Trained Professionals” . I spent good money with my accountant, my lawyer, and that was wasted. Looks like a conference call between them and my banker may have been a good bet! My risk to drop the investment properties into the LLC and then have the bank call the note due to the “change of ownership” is one I will not entertain…and I’ve read all the arguments about “performing notes…. I thought about the Land Trust tactic but that seems just to be another slight of hand that the banks will eventually catch up with.

    So now I am just trying to get liability insurance for 2M for each of my duplexes, and restart as a sole proprietor. I am sooooo frustrated about all this! Any thoughts??? Enjoy reading your stuff! Tim

    • Brandon Hall on February 25, 2018 at 9:47 pm

      Generally the LLC will need to “season” for a period of two years before it will be able to qualify for financing. At least that’s been our experience unless you are going for really large projects that come with non-recourse financing.

  3. Jason on February 15, 2018 at 11:58 pm

    Hi Brandon,

    Would a warranty deed be advised vs quitclaim deed during a transfer to a (single member) LLC? Some say the latter negates any title insurance, and the former conveys previous title insurance, though I’m uncertain. Great blog.

    • Brandon Hall on February 25, 2018 at 9:44 pm

      Honestly we always refer out to attorneys for these questions so I’m not 100% sure.

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