For individuals who own real estate, it is important to consider the best way to structure ownership of various properties. If you‘re just starting out as a real estate investor, you may hold title personally, but that may not be the most advantageous method of ownership. An option investors choose is to form a limited liability company (LLC)—or even a series LLC—to hold the real estate instead. You form such an entity through the Wyoming Secretary of State or the Utah Division of Corporations, depending on where you live.
As with any big decision, there are myriad items to think about when deciding between owning investment real estate personally or in an LLC. Here are a few:
- Liability. As the name implies, limited liability companies provide liability protection to their members (i.e., owners). LLCs allow you to separate your personal assets from your business assets. In doing so, the LLC separates the liability to which each set of assets may be subject. This separation means that if real estate owned by your LLC is at risk from litigation or creditors’ claims involving the LLC, your personal assets should not be at risk. There are limited exceptions to this rule. For example, if you did something negligent or intentionally wrong that led to litigation, even during the course of the LLC’s business, you may be personally liable. However, compliance with your state’s rules and careful steps aimed at distinguishing your personal property from that owned by your business will allow the LLC to provide greater protection against personal liability.
- Taxes. Another factor you should consider is the tax impact of creating an LLC. Single-member and multimember LLCs that hold real estate can enjoy the benefit of pass-through taxation. In some cases, the transfer of your real estate into an LLC may not have a significant immediate effect. However, depending on how many owners your LLC has, whether you have a mortgage and how much (if anything) you owe on it, and the value of the property, you may have significant tax issues to consider.
- Privacy. Creating an LLC may provide greater opportunities to keep information about what you own private. This increased ability to keep your identity as an owner private varies by state. Different jurisdictions have different rules regarding how much disclosure is required to form and maintain an LLC. Popular states for LLC formation like Delaware and Wyoming allow for anonymity. As a result, you may be able to structure your business ownership so that the public at large does not have knowledge about what you own. This can be a helpful asset protection strategy if you could ever be involved in litigation or if any of your properties are exposed to risk. Opposing parties will not be able to discover properties or business interests held in your LLC to pursue in their lawsuits. In states whose LLC statutes do not offer as much opportunity for privacy, you may explore creative ways to increase your LLC’s privacy. However, they are not likely to provide as much privacy as the statutory anonymity provided in certain LLC-friendly states.
- Tailor-made terms of ownership. Finally, one of the most significant benefits of the LLC is the opportunity to tailor the structure of your business. This means that you can define how you will split profits and losses in the real estate and how decisions will be made. These are two examples of ways you can enjoy the flexibility provided by an LLC, but there are many more. Some people create multiple entities, with one LLC focused on the management of the real estate while the other LLC or subsidiary LLC owns the assets. From determining your LLC’s tax structure to deciding whether to have annual meetings, you can design the company’s structure so that it will function in a way that makes sense for the specific assets it owns..
The LLC provides a host of options for individuals interested in maximizing their protection against personal liability and determining effective tax, ownership, and management plans.
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