It’s hard to top the feeling of generating your own income, on the basis of self-employed activity. Working as your own boss, and actually having something to show for it, really can’t be beat. Naturally, you’ll want to do everything within your power to preserve that feeling, holding on to your self-employed earning potential for as long as possible.
One way of doing that is by setting up an LLC. LLCs make a lot of sense for small business startups of all kinds, but they can be especially advantageous for those who are launching a real estate enterprise. This guide will highlight the benefits of the LLC, and provide a few suggestions for real estate entrepreneurs looking to leverage them.
What is an LLC?
It may help to start with a simple definition: What exactly is an LLC?
It’s important to know that, when you start generating income on the basis of self-employed activity, the government will automatically classify you as a Sole Proprietor. This classification does not recognize any distinction between the business and its owner; in other words, your business is not its own established legal entity. As such, your assets and the business assets overlap completely. And likewise, there is no separation between personal liabilities and business ones.
When you register your real estate business as an LLC, you actually do create a distinct legal entity. What this means is that you can keep your LLC’s assets and liabilities completely separate from personal ones, as opposed to mixing and intermingling them.
This creates some unique benefits, which is where we’ll turn our attention next.
Why Register as an LLC?
Real estate entrepreneurs can yield a number of benefits from the LLC. Consider some examples.
Personal Wealth Protection
Because your LLC allows you to keep your assets and liabilities in separate pots, you can keep your personal finances completely protected from business risk. In other words, you can make sure that your personal bank account, your home, and your family’s nest egg are all off-limits to potential litigators or creditors. This allows you to invest in your real estate business a little more freely, knowing that your personal wealth is safe and secure.
Tax Flexibility
With any self-employed activity, taxation is a big concern. When you register your real estate business as an LLC, you’re taxed on a pass-through basis, making it simple to declare profits and losses and to pay whatever you owe at your normal tax rate. You can also opt into corporate taxes if you so desire.
Administrative Ease
Running an LLC is fairly simple. In fact, you can determine the type of management structure you want, allocating duties between partners or even bringing in a third-party management team, then change that structure as needed. In the fast-paced, ever-evolving world of real estate, this type of adaptability is critical.
Credibility
Registering an LLC isn’t something you can do with the push of a button. There are a few legal hoops you’ll need to jump through in order to verify that yours is a real company, not just a hobby or a side hustle. The upshot is that it establishes your professional legitimacy. Simply put, LLCs convey credibility. For real estate companies, that means greater ease recruiting investors, partners, and clients.
Registering Your Real Estate Business as an LLC
Clearly, there are many good reasons to turn your real estate business into an LLC. The question is how.
Specific steps for registering an LLC can vary by state, but here’s a general outline of what’s required.
Start with the Name
One of the first things you’ll need to do is decide on a legal name for your real estate LLC. The main thing to remember is that it has to be original, not something currently in use by another LLC in your state. You can likely find an online directory to confirm that your chosen moniker is still available.
Name an Agent
Another important decision is who you’ll choose to be your Registered Agent. This is a person or organization tasked with receiving legal and tax documents on the LLC’s behalf. Make sure you choose someone with a physical mailing address in your state of operation. If you have real estate holdings in multiple states, you’ll need an Agent in each. Consider seeking the best LLC service for your company.
Create an Operating Agreement
The Operating Agreement is an essential document, allowing you to specify how you’ll manage your business. It should encompass details like how you’ll allocate responsibilities between your partners, how you’ll bring new partners into the business, and how you’ll handle the departure of a partner. An Operating Agreement provides a safeguard against significant legal conflict down the road.
File Articles of Organization
This is the paperwork that legally establishes your real estate business as its own LLC entity. Note that when you file this document you’ll also need to pay your state’s filing fee. Depending on where you’re setting up shop, this could be as low as 20 bucks, as high as $300.
Get an EIN
Your EIN is your Employer Identification Number… sort of like an SSN, but for the LLC itself. You can claim one from the IRS website. You’ll need this number before you can pay your taxes or do payroll.
Use Your LLC for Sustained Real Estate Success
As you consider ways to propel your real estate business toward greater long-term success, one thing to think about is legal structure. Registering your real estate venture as an LLC may be the best thing you can do to secure your prospects long-term, all while ensuring administrative ease.
