An LLC is a limited liability company, and in some cases, it’s the right decision for a real estate investor with a growing business. It’s important that all real estate investors understand the risks associated with operating a business, and what role an LLC plays as you grow. We’ll break down all of the basics here.
LLCs are limited liability companies, which is a U.S.-specific type of private, limited company. LLCs are a legally recognized business structure. Different states have different statutes that regulate how an LLC can operate. When you open an LLC, you will choose which type of LLC you want, which not only impacts your role in the company but also how that company will be taxed by the IRS.
There are a few types of LLCs:
Single Member/Sole Proprietor LLC — If you own investment properties by yourself, it’s likely that you are going to pursue a single member LLC taht is disregarded for tax purposes. What this does is separate your business assets from your personal assets.
Multi Member/Member Managed LLC — If you are part of a group, or want multiple managing members in your LLC, this may be the right delineation.
A few additional LLC types exist that include domestic LLC, foreign LLC, series LLC, L3C company, restricted, LLC, etc.
When you file your articles of organization and operating agreement (more on that in a minute), you will indicate how you want your LLC to be taxed. These are the core real accounting considerations related to your LLC, and ones that you probably want a real estate accountant to weigh in on.
There are four common choices:
The primary reason to create an LLC as a real estate investor is for legal protection. By operating as an LLC, you limit liability, safeguarding your personal assets from any claims that could come against your business. Many real estate investors open LLCs to also provide additional tax options, add credibility to their businesses, and streamline operations.
Opening an LLC is not difficult. Regardless of your state, these are the fundamental steps to take to open an LLC:
As you open an LLC for your real estate investing business, you’ll want two professionals on deck: a lawyer and an accountant. Ongoing operations will require some coordination between these two individuals or teams to ensure you remain in compliance.
LLCs are a useful and important way to add structure to a growing real estate investment business. However, they aren’t as simple as “set it and forget it.” They do add a layer of complexity to your personal finances, and you need to be sure that you are doing things right.
Here are some overarching tips:
A bookkeeper is probably an imperative at this point in your business development. If you’re looking for accounting services from a real estate CPA, learn more here.
Forming an LLC for real estate investments is a sound approach to protecting your personal finances, and you can scale into more complex methods as your business grows. In some instances, you may wish to acquire properties in multiple states. You can use a sophisticated LLC structure to create a holding company, then have LLCs in individual states. In another scenario, you may wish to have large properties connected to their own LLCs. There are a variety of ways to play this and ensure you’re getting the maximum benefit while reducing your risk.
For guidance through the accounting dynamics of your LLC or real estate business as a whole, you can work with a real estate advisor. These are qualified, highly specialized CPAs that work directly with you, getting the full picture of your current business and future goals, and advising you on the right accounting methods not only to stay in compliance or plan for taxes, but also to save money through strategic deductions and build sound practices that grow with your business.
To learn more about advisory with us, reach out today.