Do I Need an LLC for My Real Estate Company?
Buying and selling real estate rarely goes out of fashion, and in 2022, it’s as good a time as any to start your own real estate venture. But before you go for it, you need to answer one question: what legal entity is best suited for such kind of business?
As of today, the most popular types of business structures in the USA are:
- Sole Proprietorship;
- Partnership;
- Limited Liability Company (LLC);
- Corporation.
Among these four, limited liability companies stand out as arguably the fastest-growing and most attractive option for small businesses, according to the statistics. Is this true for the real estate market? Let‘s find out!
Pros of Starting an LLC
Start your own LLC gives its owner admirable freedom for initial setup and a solid foundation for business growth. The key benefits of a limited liability company are:
- Quick and easy registration;
- Various management options;
- Asset protection;
- Business credibility.
Quick and Easy Registration
Time and money are two things small businesses never have enough of. Fortunately, creating an LLC from scratch doesn’t require inhuman efforts.
- Make up a business name;
- Choose a registered agent (a person or a company that’s going to receive your mail);
- Discuss the terms with your co-founders and make an operating agreement (in written or oral form);
- File the Articles of Organization (your formation documents) with the state you’re going to operate in;
- Get a tax ID (EIN) if you plan to have employees;
- Open a bank account.
You can register an LLC on your own or delegate it to a specialized formation company. In any case, a few hundred dollars and a couple of weeks later, your real estate company is ready to roll!
Various Management Options
An LLC is a very flexible structure, allowing it to have unlimited members. You can manage it by yourself (single-member LLC) or share responsibilities and profit with other people or companies (multi-member LLC). You can even hire third-party managers to do the job for you — the choices are infinite.
Asset Protection
The real estate market is full of rocks that may put your company at risk. Just imagine if a customer gets injured in one of the houses you’re trying to sell. A lawsuit is the very least of what you can expect in this situation.
But thanks to limited liability, the court will not be able to take your property, like a car or an apartment. The LLC structure separates your money and belongings from the company’s possessions, protecting you from unfortunate events.
Business Credibility
Entrepreneurs who choose to own a business as sole proprietors have to register a trading moniker (DBA) if they don’t want to operate under their full registered name. On the contrary, LLC owners can brand themselves whatever they like (provided the name is available and follows certain rules). Also, adding “LLC” or “Ltd.” to your company’s name makes it sound more solid and respectful.
Cons of Starting an LLC
Now let’s take a look at some of the downsides of starting a real estate LLC:
- Extra paperwork;
- Limited membership flexibility;
- No outside investment.
Extra Paperwork
While creating an LLC is not hard, maintaining it year after year can be a bit tedious at times. Most states expect to get annual reports from all LLCs that also come with certain fees. Additionally, each owner must manage their personal bank account and file their own tax report at the end of the year.
Limited Membership Flexibility
You can form a limited liability company with as many members as you want, but getting them in and out afterward proves to be difficult. Typically, you’ll need to make changes in the Articles of Organization and the operating agreement. However, sometimes it may be necessary to dismantle an LLC completely and then register it again with new ownership.
No Outside Investment
LLCs can be financed by different sources, but they can’t get money from people who are not part of the current ownership (this does not include crowdfunding and various fundraisers). Because of this fact, an LLC is not a good choice for entrepreneurs with national ambitions and potential capital injections.
LLC 101
What exactly is an LLC? It’s a form of private venture exclusive to the United States that mixes the affordability of sole proprietorship/partnership with limited liability typical for corporations. These companies can be run by one or multiple owners that share costs and income according to the company’s operating agreement.
Setting up an LLC takes 5 days to several weeks and costs from $50 to $500 depending on the state. The registration process can be done by mail, in-person, or online which is very convenient.
LLC Taxation
Not all LLCs are created equal when it comes to taxes. If a venture has one member, it’s taxed as a sole proprietorship, meaning that you don’t have to file a separate report for the business income.
If the company has multiple owners, it’s subject to pass-through taxation. In other words, each member files their own tax report according to how much they own and earn in the company.
The third option for an LLC is to choose an S-corp or C-corp status. While it doesn’t change anything legally, the company will be forced to pay additional taxes and calculate salaries a bit differently. This method might be suitable for companies with very high incomes, but it’s recommended to ask tax experts for advice before you make the change official.
More about small business taxation – at https://www.sba.gov/
Which is better for my real estate company — an LLC or sole proprietorship?
Whenever there’s a risk of being sued by the clients, you should avoid choosing a sole proprietorship model. Although you may get interesting insurance options for it, this structure can’t provide the same level of personal asset protection as an LLC can.
Do I need a business bank account for my LLC?
Separating your business finances from personal capital is why you choose a limited liability model in the first place. So, both your company and each of its members must have their own bank accounts to make sure their assets don’t mix up at any point.
Furthermore, a corporate account is a convenient way to store transaction money and staff salaries.
Final Thoughts
Minimizing costs and risks is as important for real estate as for any other business. An LLC offers all that and even more, making it our choice as the best starting platform for real estate careers.