The limited liability company (LLC) has in recent years become the most popular legal structure for real estate investors seeking personal liability protection and flexibility. The exact requirements vary slightly from state to state, but setting up an LLC is a relatively simple process that can usually be done in one to four hours, depending on the complexity of your organizational structure.
You don’t have to hire legal counsel to form an LLC, but it is sometimes advisable if the LLC will have multiple owners or outside investors.
Disclaimer alert! I am not an attorney, nor am I a CPA. I am a real estate agent who is also a real estate investor and the information provided here is my personal opinion based on my own experience.
Before we get into the steps associated with setting up an LLC, let’s first discuss what an LLC is.
What Is an LLC?
LLC is an abbreviation for limited liability company. It’s a business structure that provides a business with limited liability (similar to a corporation), but the structure is easier to establish and simpler to maintain. It also provides the business with pass-through treatment of income for tax purposes, similar to that of a sole proprietorship or a partnership.
Owner’s Limited Liability
This is where the term “limited liability” in LLCs comes from. The LLC provides protection to the LLC owners by limiting the owner’s personal liability. Generally, this means that business debts owed by the business, and other claims on the business, including liens and lawsuits, are limited to the assets of the business itself. Those holding such liens against the business cannot pursue the personal assets of the business owner(s) in most states and under most circumstances.
This protection, however, does not extend to illegal acts committed by the owners of the LLC, and can also be lost in the case of certain instances of negligence on the part of the owners.
Pass-Through Treatment of Income Taxes
Unlike a corporation, an LLC is not considered to be a distinct entity for income tax purposes. The owner(s) of the LLC report their operating results, including profit or loss, on their personal income tax returns, just as they would as either a sole proprietorship or partnership. No return is filed specifically for the LLC.
One last point worth mentioning, if a mortgage is through your LLC, it will not show up on your personal credit report. Thus LLCs can shield you from debt that you’re taking on.
Setting up an LLC is a pretty simple process, especially compared to setting up a corporation. It’s actually a multi-step process that looks something like this:
Setting Up an LLC
1. Talk to a CPA & Find a Lawyer
While this isn’t required, it is a good idea especially if this is your first time setting up an LLC for the purposes of holding Real Property. Though it will cost you, you’ll benefit from their expert advice. They’ll understand how to meet your financial needs, explain what your tax liabilities are, and what to consider when setting up an LLC.
2. Choose a Name
There are two considerations here, the first being to choose a name that doesn’t duplicate that of an existing LLC in your state. Your state will let you know if the name you choose is acceptable.
The second consideration is that your business name must comply with state regulations in regard to LLC names. Generally, this means that “LLC” or “limited liability company” must appear in your business name. There may be other requirements depending upon the state where you are attempting to establish your LLC.
If you own one property and that’s all you ever plan to own under this single entity, you can name the LLC after the associated property address.
3. Choose a State
I personally register my LLCs where my properties are, however, some pick certain states for tax purposes or other benefits. But to keep it simple, I set up my LLC where the property is located. You can also set it up in the state where you’re a resident.
Next, you want to go to the state’s website to register your LLC. Make sure the name you want is available and then you fill out the necessary paperwork to get your LLC up and running. There is a fee associated with this and this varies from state to state but here in Ohio the filing fee is $99.
FYI, the following step runs concurrently to this one. So if you do Step #4 before 3, that’s fine.
4. Set up an EIN Number
Go to IRS.gov—and good news, this is free! When you’re registering your business with a state, it will ask for your Employer Identification Number (EIN) however, I recommend performing Step #3 first to ensure the name you want is available. Once you’ve done so keep the state tab open on the page asking for the EIN.
To get the number, you’ll have to fill out a questionnaire on the IRS website, but it will only take about 10 minutes. Once you’re done with that, you’ll be given an EIN that you can then fill out on the state page.
5. Find a Registered Agent
This should be the primary contact who lives in the state where you intend to do business. If you’re investing in your home state, then you are the registered agent. But if you’re not investing in the state where you live, you’ll need to find a registered agent.
There are registered agent services (these cost about $100-$200 per year) that can represent you if you’re doing business out of state. They essentially provide you an address and warm body that can speak on your behalf.
I recommend talking with your lawyer when seeking out a registered agent out of state.
6. Create an Operating Agreement
This defines the managing member, which could be you, a partner or spouse, or a group of people. The important thing is that the managing member is the one calling the shots. They are basically the president of the company.
This agreement references the goals of the company, employee roles (if it’s not just you), and so on. This agreement doesn’t get filed with the state. It is simply a legal document that you need to formalize the terms of the LLC.
Now that we’ve gone over how to set up an LLC, let’s get into how to maintain one.
Maintaining an LLC
1. Keep up with Annual Expenses
If there is a change in the registered agent, a notification must be delivered to the state. You’ll have to send in your registration certificate. Or you may have to send in your annual report that states who the agent is, who’s still at the company, where the company is located, and cover the related fees.
Remember, if you’re not the registered agent you’ll be paying an annual fee to the registered agent service.
2. Pay Taxes
You’ll have to pay federal taxes as well as taxes to the state that you’re registered in. If your business is located in one state and the investment property is in another, you may have to pay taxes for both those states. This is why I recommend registering your properties where your business is.
This is also why you should hire a CPA as they will be able to guide you through this and assist you in making decisions that limit your tax liability.
Bottom line, LLCs are great when you own property and not nerely as complex as many believe them to be.
If you, or someone you know is considering Buying or Selling an Investment Property in Columbus, Ohio please give us a call and we’d be happy to assist you!
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