If you plan to really get into the real estate investing business, you need to make sure you are setting yourself up with plenty of legal protection.ย The best entity to hold your real estate properties in is a Limited Liability Company, or LLC. This is something that I personally utilize in almost every real estate investment I make. And there are four huge reasons I do this.
- Limits liability:ย An LLC limits what liability you are exposed to. It is difficult for someone who is suing you, i.e.ย a tenant, to penetrate the LLC. Their attorneyย has to get a Charging Order in order to get toย what is held in the LLC itself. It is an amazingย shield for protecting you personally from liability! All you need is one lostย lawsuit for you to lose everything you’ve worked to build.
- Advantageous Managementย Structure:ย This is an interesting one. You can have from one to an unlimited number of members in an LLC, which provides you with a lot of options. You can also bring in otherย members or a new managing member into an LLC. But here’s what I like to do in real estate. Whenย you’re setting up theย company, form a Single-Member LLC around eachย individual piece of property you own. Then,ย ifย you have multiple properties, form anย LLC Tree. Makeย each Single-Member LLC feed up into a Master LLC (which in my case is a two-member LLC, Becky and I). But have that Master LLC be owned by a Living Trust. So if somebody sues you they have to penetrate the Single-Member LLC first. And if theyย come after you hard, they have to penetrate the Master. And if they doย get to the Masterโwhich isย difficult to doโthen all that gets exposed is just what is held within that particular LLC and the equity you have in that property. Soย sayย someone sues you.ย You have ten properties each with an LLC around them. That person is only really able to attack that one property. Your other assets are protected. All this is why you need to have an attorney and an accountant to make sure you’re doing everything correctly!
- Tax Benefits:ย Tax benefits flow through to you as the member of the LLC. In my case, it flows through to me from the Trust from the Master LLC. A C-corp is really taxed twice. It has to pay taxes on theย earnings it makes as a corporation and then any money you receive from that corporation has to be taxed as well. And that’s a huge disadvantage. But because the taxes flow through to you as an individual, both the profits flow through to you. But, for example, you also get the depreciation personally, even though your’e still protected from a liability standpoint. The IRS allows you to count it as a lossย even though it doesn’t really come out of your pocket. If you have Single-Member LLC’s, then as far as the government is concerned, you don’t have to file a tax return. You just list it on your schedule E. And you still get the liability protection as if you own the property directly.
- Estate Planning:ย An LLCย helps us in estate planning by providing a vehicle for passing wealth to ourย children–without having to re-title the real estate properties! Once the real estate property is transferred into an LLC, the member’s interest is converted to personal property which is represented by shares in the LLC. Andย these shares can be given to your children incrementally as tax-free gifts up to $10,000 annually. This is a great benefit if you want to start transferring the interest and equity in your property to your children. And it’s a relativelyย simple process compared to filing a new deed. You can still maintain control as the acting manager of the LLC.
These four advantages have proven themselves time and time again in my experience in real estate!ย What’s holding you back from forming an LLC?
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