One of the questions that I get on forums and via my email all the time is, “David do I need to create an llc to buy houses?”
The short answer is No. You can buy a property in your name with no problem.
My thought process has always been, if you are going to do business, you need to do business correctly. If you plan on being an investor that buys, sells, and/or rents property, my answer is…yes you should create an LLC.
In my opinion, forming an LLC or incorporating your business is the best thing that you can do to really make a lot of money in real estate. A properly formed business allows you to scale your real estate investing and minimizes your liability at the same time. This article is going to be about creating an LLC and the pros and cons of doing that.
Before I get into the pros and cons of an LLC for a Real Estate Investing business, here is a definition of what an LLC is…
What is an LLC?
A limited liability company (LLC) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation in and of itself; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as a not-for-profit.
A limited liability company (LLC) is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC is a type of unincorporated association distinct from a corporation. The primary characteristic an LLC shares with a corporation is limited liability and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner. (source)
An LLC can have one person as the managing member or multiple people and/or companies, with each having a certain percentage of ownership.
- You can write off pretty much everything on your taxes
- You can get business credit for that LLC
- You sign for the business, not for yourself
- Establish bank accounts in your business name, not your personal name.
- Protects you from personal liability
- Separates the business from your personal accounts
- More paperwork
- Different tax structure
- Yearly renewal fees to the state
In my opinion, the pros far outweigh the cons. Some will disagree with me on this, but If you do not at least form an LLC for your real estate investing business you most likely will not succeed.
Did You Know?
Some lenders will not even lend you money on a property if you do not have an LLC formed to do the transaction.
A strategy that we use when buying properties that we will keep is to create an LLC for each property that we purchase. This shields our other properties from any liability regarding that property. I must admit, one problem with this strategy is that it creates more paperwork and a little more expense, but it is worth it in our opinion.
What Do I Need To Create an LLC
Many people think that it is complicated to set up an LLC, but it’s actually quite easy to do. You can use a lawyer or do it yourself. You will be able to do everything online at your state’s Secretary of State website. The paperwork to create an LLC is really not that much.
When forming an LLC you will need to create a document known as the Articles of Organization.
The Articles of Organization is the document that you will file with your secretary of state. This is done online at your Secretary of State website.
You will need to provide the following basic information in your Articles of Organization:
- What is the purpose of your LLC?
- Figure out what the name of the company will be. Make sure the name is not already being used.
- Who will be the members of the LLC and what are their roles.
- Who will be the registered agent? The is the contact person for the LLC, where any mailings can be directed to. The registered can also be your lawyer.
- Signature of the person organizing the LLC
- That’s really all there is to it when it comes to completing the Articles of Organization.
You will also need to create an Operating Agreement for Your LLC
An operating agreement is a key document used by LLCs because it outlines the business’ financial and functional decisions including rules, regulations, and provisions. Many states do not require an operating agreement when forming an LLC.
It is wise to create one because by creating and agreeing to all the terms laid out in an operating agreement, members find there are fewer discrepancies in how business is conducted or how profits and losses are distributed. An LLC Operating Agreement also allows members to specify their own rules for the company, and serves as an important reference tool if a member decides to withdraw, the company dissolves, or a new member is admitted.
How Long Will It Take to Set Up My LLC
This depends on your state. It may take anywhere from 24 hours to a week. The longest I have waited from start to finish is 48 hours.
Get an EIN for Your LLC Business
You will need to obtain an EIN (employer identification number) from the IRS. This number is unique to your business and will be used to identify your business, similar to a social security number. You will fill out a Form SS-4 and the IRS will issue you your business EIN. This may take from 5 minutes to a few hours to get. They are pretty fast. Learn more here>>
Get a Business Bank Account for Your LLC
Once you have your paperwork back from the state and your EIN from the IRS, you will be able to open a business account at pretty much any bank. They will verify everything and get you going.
That’s it. You are now in business and can start buying and selling real estate in your business name, with minimal liability.
So, back to the original question…Do you need LLC to invest in Real Estate?