Shall I form an LLC for my Real Estate Investment ?
Over the last decade, Limited Liability companies ( LLC’s ) have become one of the most preferred forms of business entities through which to hold title to investment real estate properties.
LLCs did not come into existence in the United States until 1977 when the State of Wyoming enacted special legislation to accommodate the needs of oil companies, now all 50 states have enacted legislation creating some form of the LLC structure.
The insulation from personal risk exposure for real estate investors provided by LLCs, coupled with the relative ease of administration and potential tax benefits, make ownership of investment property through an LLC a very desirable option in most instances.
What are the main 3 reasons to Form an LLC ?
- The main reason and as the name suggests is to Limit your personal liability.
An LLC lowers the owners risk from any hypothetical lawsuit, the LLC provides an insulation to the owner as only assets owned by the LLC are exposed to any hypothetical lawsuit. This corporate structure ensure the members of the company are not personally liable for the company’s debts or liabilities. However the business owner could be held responsible for corporate debts in certain situations especially if you personally guarantee any business loans, credit cards, or other extensions of credit to your LLC.
In all states, having an LLC will protect owners from personal liability for any wrongdoing committed by the co-owners or employees of an LLC during the course of business.
2. Pass-Through Taxation for Single & Multimember LLCs
Under the default tax classification rules, the IRS classifies a real estate holding company with one owner as they would a sole proprietorship, namely as a “disregarded entity.” As a result, income and capital gains from the LLC pass through directly to the owner, who would only have to pay taxes as an individual, while still enjoying the protections offered by the LLC liability shield.
Since there is no separate LLC tax, the owner can avoid double taxation on both the rental income generated by the property and the appreciation in value of the property upon disposition. Moreover, the owner of a single-member LLC can deduct mortgage interest similar to a sole proprietor based on current IRS rules.
Real estate holding companies that have several owners are known as “multimember” LLCs and are generally taxed by the IRS like partnerships, meaning that the LLC files an “informational” tax return, but does not actually pay taxes itself.
Multimember LLCs also enjoy the benefits of pass-through taxation as the LLC passes its profits and losses through to its members, who report their portion of the LLC’s business income or losses on either a Schedule C, K or Form 1065 with their individual income tax returns. This means that both single member and multimember LLCs offer the benefits of pass-through taxation of profits and losses and limited liability and personal protection for the owners.
Obviously every buyers circumstances are relatively different and Global Investments do not provide tax, legal or accounting advice, you should always seek professional advice. If you wish to learn more regarding tax obligations then Global Investments can introduce you to professionals in the US that can offer this advice free of charge.
3. LLCs Can Make Business Life Easier
When delegating management responsibilities, LLCs enjoy much greater flexibility than either a corporation or partnership. While corporations are statutorily required to have officers and directors, the LLC can be easily managed by its owners or third-party managers.
In the many states that impose increased fees based on the authorized number of shares, LLCs may pay lower state registration and maintenance fees than corporations.
Owners of LLCs can take advantage of the tremendous flexibility in the distribution of profits, as determined by the LLC’s operating agreement. Cash flow distributions do not have to be pro rata according to ownership like an S corporation, which gives the owners the ability to financially reward the effort of select members through appropriate distributions of available cash flow.
Unlike an S corporation, foreign ownership and investment in U.S. real estate is possible through an LLC.
LLC owners can also easily transfer their ownership in real estate holdings by proactively gifting the company’s membership interests to their heirs each year. Over time, it is entirely possible to effectively pass ownership of real estate owned by an LLC to loved ones without ever having to formally execute and record a new deed.
By opening a LLC will enable you to open a US bank account. Your management company can then transfer your rental income into your US bank account which helps you save on transfer fee’s and limits exposure to exchange rate fluctuations.
What are the disadvantages of having an LLC ?
Ask an insurance company and they may recommend you save the cost of setting up an LLC by just increasing your liability insurance on your policy. After you close on a property Global Investments ensure we put you in touch with the best insurance companies for your needs and make sure you have the correct cover to give you peace of mind.
2. Obtaining Finance for your property purchase
Almost all lenders will not let you borrow in the name of the LLC. Instead, they want someone personally liable. This may require you to buy the property entirely in cash, or you can try to deed the property to the LLC after purchasing in your own name.
Generally speaking Global Investments only deal with cash buyers, our properties are priced in such a way that they sell to buyers ready to move fast.
3. The cost of setting top and running an LLC
Obviously setting up an LLC is not free of charge and you would require a good CPA to organise this on your behalf to ensure things are done correctly. Global Investments will help you with this also. We have reputable fully qualified staff on the ground that will take carte of your needs for a very reasonable fee.
As you can see the issue of whether to form an LLC needs to be given some thought and each landlord’s situation differs. Global Investments are more than happy to put you in touch with a regulated CPA in the US to discuss whether an LLC will benefit you.