Investing in real estate is one of the best ways to earn a passive income, if you do it right. Like most other investments, however, real estate has its own ups and downs and a wrong move could set you back thousands or even millions of dollars in losses. In a bid to mitigate some of these risks and reap the rewards of real estate investment, more and more investors are opting to form real estate LLCs. If you are interested in joining the world of real estate, here are 4 benefits of forming an LLC. 

1. Easy to register 

Establishing a real estate LLC is relatively fast and easy. The four main steps that you need to follow are: 

I) Choosing a business name – Look for a unique name that does not currently exist in your state and that is in line with state requirements 

II) Filing the Certificate of Organization – This is a document that looks to validate your LLC. It typically includes information such as the name and address of your company, as well as the names of all partners. We will file this document with the Secretary of State.

III) Creating an operating agreement – This is an important document that describes how to handle specific business of the LLC.  The operating agreement describes how/ when meetings must be held, who votes and under what circumstances they may vote, how to add or remove members to the LLC, how to address disagreements between members and many more important issues.  It is likely your bank will want to keep a copy of your operating agreement on file to open a business bank account.

IV) Obtaining permits and licenses – once you have registered your company, you need to obtain the necessary business permits and licenses to ensure that you are operating within the law

2. Protection of assets 

A real estate LLC has the ability to protect investors from potential liability. This is because an LLC separates your personal assets from the business assets, ensuring that you are not personally liable for the company’s debts. This means that in the event of a lawsuit against the company, your personal property cannot be used to service the debt. However, it is important to note that there are certain exceptions to limited liability. You could be held personally liable if you:

• Directly injure someone else 
• Withhold taxes from employees’ wages and fail to deposit the money
• Sign yourself up as a personal guarantor of a loan that eventually defaults 
• Intentionally engage in illegal, fraudulent, or reckless activity that harms the LLC or another party
  
  
• 3. Pass-through Taxation 

Forming a real estate LLC has some tax advantages too. When you form a real estate LLC, you can report the company’s profits or losses on your personal tax returns, thereby preventing the business from being taxed directly. Doing this could lead to a lower tax rate and helps you avoid double taxation. Investors have 3 general options: 

• Corporation LLC – Members can be taxed as a corporation 
• Partners LLC – Members can be taxed as a typical partnership 
• Single Member LLC – The owner is taxed through his or her personal tax return instead of taxing the business 

4. Builds credit for the business

When forming a real estate LLC, you need to apply for an Employer Identification Number (EIN), which allows you to build credit for your business without affecting your personal credit. This can really come in handy for investors, as you may be able to take credit lines under the business name after building a solid credit rating. 

The most effective way to protect yourself when investing in real estate is to work with a reputable and experienced attorney. As a member of the Iowa Bar Association’s Real Estate & Title Section Council, Jeremy Danilson has an extensive background in real estate and is available to provide legal guidance you may need. Get in touch today at 515-512-5500.