No doubt, real estate is a great investing niche to make big bucks. But, have you ever thought what if someone were to sue one of your properties? That’s where an LLC comes in. Limited liability company protects the rest of your holdings from financial ruin. There will be no spillover effect on your other rental properties from any legal action, offering you further peace of mind. It’s such a great idea to secure your assets. Isn’t it? So, if you’re paving the way to open a real estate company, why not form an LLC company?

A limited liability company is quite different from other business models in the US as it protects its members from personal responsibility. 

You might be confused about whether you should form an LLC for real estate or not. Is it advantageous? Is there anything negative about it? I’m going into the nitty-gritty of it to remove your curiosity. So, stay hooked!

Pros & Cons Of Forming An LLC For Real Estate

Before opening an LLC for your real estate, you must know about its positive as well as negative sides. Let’s dig into the pros first.. 

Pros

1. Liability Protection

What else could be the best thing to secure financial assets when doing business? Of course not. That’s why you should create an LLC company for your rental business.

Imagine for a minute, what would you do if a third party sues you for any reason? Obviously, you’d be caught in the lawsuit and you won’t know how long it would take to resolve. So, if you form an LLC, they cannot go for your possessions. That is to say, you will not have to put up any of your own money or property as collateral.

You can maintain your real estate properties as a distinct LLC from the rest of your assets and company operations. 

2. Flexibility

Do you want to work alone or in collaboration with others? A real estate LLC gives you the flexibility to run your firm as a sole proprietorship, a single-member LLC, or in conjunction with a community of real estate investors, each of which might be your additional growth prospects. 

3. Pass-through Tax Benefits

If you form an LLC, you won’t be worried about filing a separate tax return for your rental company's earnings; instead, you may just include them with your income. The best thing is that you don’t have to pay the extra money that would otherwise go to the government in the form of double taxes that companies must pay if they were subject to a higher interest rate. 

However, if you have partners in your business, you will only be responsible for paying taxes on your share of the company's revenues, which will be outlined in the terms and conditions between you and your partners.

4. Reasonable Setup Cost

How can you neglect the setup cost for your business? Obviously, you’d prefer the cheap and perfect solution which is forming an LLC for your real estate. But, remember that the specifics of doing so might vary by state.

5. Greater Expertise

If you want to seem more professional and reputable to investors and grow your real estate firm to include numerous properties, then incorporating a limited liability company is a wonderful option to do it. If you want to rent your houses, you must consider this in mind as well as it is a smart move for advertising and promotion.

6. Managerial Adaptability

If you set up a limited liability company, you could enjoy more autonomy. Instead of working alone, you can work with numerous partners. You can specify the allocation of profits, and the obligations of each member as well. You can decide who will handle day-to-day operations and who’s responsible for managing other things. 

Cons

I agree that setting up an LLC is worth its weight in gold, but it comes with a few drawbacks that you must be aware of. So, let’s demystify these.

1. More paperwork for the IRS

Even though the Internal Revenue Service treats LLCs as pass-through entities for tax purposes, you still need to submit a separate tax return each year. A limited liability company (LLC) reports its members' share of deductible business costs and pass-through revenue on IRS Form 1065 and issues a K-1 to each participant detailing his or her share of the LLC's taxable profit or loss for the year.

2. Annual Filing Fee

Most states need a yearly or semi-annual filing fee from an LLC in order to maintain the business in good standing after it has been created and registered. Keep in mind that some states might cost hundreds of dollars. 

If you choose to hire a registered agent in your local state, it will also cost you around $100 per year. 

3. Not Immune To Legal Action

Liability protection is an attractive feature and motivates you to set up an LLC for rental property, but it is not a guarantee. If you are found accountable in a lawsuit for dishonesty or carelessness, the prevailing party may sue you personally for the debts and damages at issue.

4. Possibility of a Transfer Tax

If you decide to change the property ownership, you might have to pay a title transfer tax in certain states, however,  this is not always the case. You should fork up some extra cash if you see a turnover in your company's membership or if you sell any of your real estate assets. It is also called a stamp tax and is usually equivalent to the property's assessed worth.

5. Difficulty in Securing Financing

Do you have a good credit score? If yes, that’s great. Otherwise, don’t think of forming an LLC. Do you know that it is very difficult to get a loan via an LLC since most lenders need personal guarantees from all members? Yes, everyone in the group must sign the mortgage loan paperwork and is responsible for paying off any mortgage obligations associated with the property. Therefore, it may be more challenging to be accepted if not everyone has a strong credit score. 

6. Setting up Is More Challenging

LLC requires extra paperwork. If you are seeking a fast way to form an LLC, you must consider this aspect. It can take longer to complete the whole procedure, from submitting paperwork to obtaining licences, new loans, and new bank accounts. Therefore, you should be ready for any filing delays and other mistakes.

Bottom Line

Now, you’re aware of how forming an LLC could be a million bucks, and what bad things can come from it. Just like nothing is perfect, forming an LLC to manage your rental property has both pros and cons. However, if you weigh them, the pros will definitely be heavy! You may decide to establish an LLC for your real estate as it seems more professional.