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Setting up an LLC for Real Estate

I am often asked if real estate investors need to create a separate Limited Liability Company (LLC) for each investment property they own, or if one LLC can cover them all. My answer is always: create an LLC for each property. In fact, many investors and builders name each LLC after the address of the property, i.e. “123 Main Street, LLC.”  This practice will give you the greatest amount of liability protection for your real estate investments. Let’s back up a bit and remind ourselves why an LLC is so important in the first place.

In an LLC, the owner’s personal assets are shielded from business liabilities just as they would be in a Corporation.  In addition, the IRS views a single owner LLC as a “disregarded entity” for income tax purposes. Thus, an LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to the owner’s individual tax rate. The LLC is great for a business that wants liability protection, but seeks minimal formality.  It’s also the perfect structure for a business with foreign owners since anyone (C Corp, S Corp, another LLC, a trust, or an estate) can be an owner of an LLC. With any property, there are inherent liabilities — from a broken balcony railing to old electrical wiring or mold. The LLC forms a wall that shields individual owners from personal liability. If sued by a tenant or guest, the defendant is the LLC, not you. And the judgment can be collected only from the LLC’s assets, and not from your own personal assets.

Now getting back to the case of multiple properties. For example, let’s say you purchased a few rental properties and deeded them both to your LLC (named My Properties, LLC). An unfortunate incident occurred at one of the properties and your tenant was awarded a large settlement. In this case, the judgment can be collected from any of the assets owned by My Properties, LLC — this includes both the property where the accident occurred, as well as your other rental properties included in the LLC. By setting up distinct LLC’s for each property, you can protect each investment on its own. If Property A is sued, only those assets belonging to LLC A are affected. Your own personal assets are shielded, as well as those from Property B, Property C, etc.

While setting up and maintaining multiple LLC’s may seem like a hassle, taking that little extra time upfront will help you make the most of your investments and avoid any legal pitfalls in years to come. Of course, details may vary based on your specific circumstances. However, in most cases the LLC is the ideal business structure for your real estate investments to protect your real estate assets and offer the maximum in tax benefits. If you decide to proceed in forming an LLC for any of your real estate investments, you will have to file Articles of Organization with your Secretary of State to bring the LLC into existence. Hylen CPA’s professional staff is here to assist you every step of the way… And once you know what you’re required to file, we can take care of the details for you!  If you have specific legal questions or concerns, you should consult an attorney for sound advice. After all, your business is worth it.

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