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There are a lot of benefits of forming a limited liability company or LLC that is why this is popular avenue investors take when they want to acquire properties and protect themselves from any number of liabilities. The provision of protection from liabilities of the investors and the relative ease of doing administering as well as tax incentives make it a desirable option for many.
Here is a breakdown of the reasons why you should start a real estate LLC
1. Protection of Personal Assets
One of the main reasons why investors form an LLC is to protect themselves and their individual assets from liabilities. Although Illinois LLC’s have several benefits, many of those who apply for them seek the protection from this structure next to taxation benefits. Let’s say you rent out one of your busier properties in Chicago to a tenant who turned it into a convenience store. One day, for whatever reason, one of their customers tripped and fell inside the store.
In today’s litigious environment, it is not a remote possibility that the injured person will file a complaint against the property owner. If the property is named under a person’s name then that individual will be named in the lawsuit as the owner. This jeopardizes your personal assets as they will be part of the investigation. However, if it is under an LLC, the investor is insulated by the company and reduces his exposure to any lawsuit directed towards the property’s owner.
2. LLC and Liability Insurance
Many real estate investors find affordable liability insurance favorable than managing an LLC entity. They may not find it optimal as a vehicle to carry their assets especially if they’re just looking into theoretical threats of lawsuits. However, it is worth noting that insurance policies carry some risk as they have caveats, exceptions, and limits. There is also the possibility of incurring a loss that exceeds the policy coverage which can be disastrous for the property owner.
3. Tax Benefits
One of the attractive benefits of forming an LLC is pass-through taxation. The IRS considers a property held by a company with one owner as a sole proprietorship. This means that the owner is taxed directly for the capital gains to be paid as an individual. This allows the owner to include the capital gains of the property in his individual taxes while enjoying the protection of the company.
This taxation scheme means that there is no LLC taxation so the owner avoids double taxation on the income through rents and the appreciation of the property, which if you have multiple properties could mean very handsome annual savings.
LLCs with multiple members will be taxed like partnerships where they will file an “informational” tax return but don’t really pay it. Instead, each member will report their share of the income and losses on either a Schedule C, K, or Form 1065 along with their own tax returns.
Owners can also transfer their real estate holdings by giving their membership’s interests to their loved ones each year. After a certain period, real estate property can be passed down to a member’s heir without having to undergo an execution and recording of a new deed. This avoids transfer and recording taxes and fees which can be substantial savings.
4. Administration Advantages
LLC is easier to handle than S corporations. They don’t have to elect officers and directors so they can readily be managed by the owners or 3rd party managers. They also have flexibility in the distribution of profits, unlike S corporations where ownership takes precedence. This allows the rewarding of members with significant contributions much easier.
5. Business Credit
LLCs allow you to effectively build credit under your company’s name. When an investor recognizes that an LLC is the best route in creating a corporate structure, they can then get an Employer Identification Number (EIN). What it can do is, allows your business to establish credit apart from your own. This is an excellent tool to build a dominant credit position for your business which includes qualifying for a credit line under its name. Ultimately, it doubles the borrowing power of the investors having both personal and business credit accounts.
Although there are some downsides in forming an LLC for a real estate company, it offers some attractive rewards that business people are attracted to. Looking from a corporate perspective, this is a no-contest option for investors seeking protection from liabilities and gaining some incentives from taxes. If you’re looking to invest in a number of real estate properties, an LLC is worth looking into.