One important step when taking your real estate investing to the next level is forming an official business entity, and one of the most popular business structures for real estate investors is an LLC.
I’m here to tell you: it’s one of the best decisions I’ve ever made in my real estate journey.
Why?
Setting up an LLC is beneficial because it removes any personal liability from your real estate business.
Plus, it can help come tax time.
But what does the process of setting up a real estate LLC look like?
I get it: it sounded scary at first for me too. But the more I researched, the more I realized how straightforward it was.
If you’re ready to learn what a real estate LLC is and how to set one up, let’s get going!
What is a Real Estate LLC, and Why Do You Need One?
A limited liability company, or LLC, is a registered business structure specifically for the purpose of minimizing personal liability in your business operations.
A real estate LLC is designed for the purpose of buying, selling, and renting properties. It can be run by a single person or have multiple members.
Advantages
The biggest advantage of starting a real estate LLC is the lack of personal liability.
This means that if someone were to take legal action as a result of your real estate operations, the business would be held responsible, rather than you individually.
Minimizing personal liability also means that your business can file for bankruptcy without it affecting your personal finances or assets.
Setting up a real estate LLC can also make it easier to grow your business.
Why?
Many lenders prefer to work with investors with a registered business, which means you could get better interest rates just by setting up an LLC.
In some cases, working with an LLC can also reduce your tax burden.
As you expand your business — something I learned firsthand—having a real estate LLC makes it easier to bring on investment partners.
This is because it’s much easier to change the terms of your LLC than to change the deed to a property itself.
Disadvantages
The biggest disadvantage of starting a real estate LLC is that it comes with upfront costs.
You’ll need to pay an initial registration fee as well as an annual fee to maintain your business structure.
If you’ve already invested in properties, transferring them to your real estate LLC can be tricky.
In many cases, you’ll need to pay the entire remaining balance on your mortgage to make the transfer, as well as transfer taxes.
How to Start a Real Estate LLC in 5 Steps
Step 1: Choose a Name For Your Business
The first step to starting your real estate LLC is choosing a business name.
Your name should contain the words ‘limited liability corporation’ or ‘LLC’.
It should also be unique — if your name is too similar to another well-known business, it could hurt your credibility.
Many states also have words or phrases that are off-limits when naming an LLC.
For example, you may not be able to use the words “bank” or “investment” without offering financial services.
Step 2: Find a Registered Agent
Every LLC must have a registered agent to receive important documents on behalf of the business.
Your or one of your employees can serve as the registered agent, or you can hire a registered agent service.
In order to serve as a registered agent, you must be 18 years of age and live in the state where your LLC is registered.
Step 3: Register Articles of Organization With Your State
Articles of organization are a set of documents you’ll need to submit to officially register your LLC.
In some states, they are called a “certificate of formation”.
Your articles of organization will outline key details of your business, including your businesses’ name, purpose, and location, as well as the names of all business owners.
Step 4: Create Your Operating Agreement
Operating agreements are required to register an LLC in five states: California, Delaware, Maine, Missouri, and New York. However, even if you don’t live in one of these states, creating an operating agreement can still set your business up for success.
An operating agreement outlines how your business will be run.
It designates funding sources and outlines profit and loss distribution among business owners.
It also provides more detail about the businesses’ day-to-day operations than is specified in the articles of organization.
Step 5: Publish Your Intent to File
In Arizona, Nebraska, and New York, you’ll need to publish an intent to file in order to start your LLC.
This typically requires you to publish an ad in a local newspaper and submit an affidavit of publication to your Secretary of State’s office.
Frequently Asked Questions
Q. What is the Best Business Entity for Real Estate?
An LLC is often considered the best business entity for real estate investors. It protects you from personal liability, but isn’t as expensive or complex as forming a corporation.
Q. How Should I Name my Real Estate LLC?
When naming your LLC, opt for something that’s simple, clear, and represents your business professionally.
Q. Can You Buy Real Estate With An LLC?
Yes, you can buy real estate with an LLC. Many professional real estate investors rely on LLCs to separate their business and personal assets.
Q. Do You Have To Live In The Same State As Your LLC?
No, you do not have to live in the same state as your LLC — you can form an LLC in any state of your choosing. However, it can be challenging to manage properties in a different state from your LLC.
Q. Much Does It Cost To Form A Real Estate LLC?
The exact cost of forming a real estate LLC varies from state to state. Registration and filing fees generally range from $100 to $500. You may also need to pay to transfer your existing properties to your LLC.
Q. When Should I Form An LLC?
If you plan on launching a long-term real estate investment business, it’s best to form an LLC before purchasing any property to avoid transfer fees
The Bottom Line: Real Estate LLC
For serious investors, forming a real estate LLC can help you avoid liability and run your business more efficiently.
The process of forming an LLC can vary between states, so be sure to check your local regulations and requirements first.
I believe in you!
