Real Estate LLC: What They Are, Should You Have One?

A limited liability company (LLC) can offer you personal liability protection from the business activities you engage in. If you are a real estate investor, a real estate LLC can protect your assets against certain lawsuits. It can also make it easier for you to invest in real estate with other partners. Here is a guide to help you decide if a real estate LLC is right for you.

Why set up an LLC for real estate

Real estate investing is a particularly risky venture. Housing price fluctuations, interest rates, and demand for homes all play a major role in your success as a real estate investor. A real estate LLC allows you to buy, sell, and rent real estate under a separate business entity. It limits your personal liability and shields your personal assets from many potential lawsuits.

How to set up a Real Estate LLC

There are a few steps you’ll need to take to properly set up your real estate LLC. You need to:

Name your LLC

First, you’ll need to come up with a name for your LLC. A name with the term “property” or “real estate” specifies your intended use for the LLC. However, there may be certain terms that you are not allowed to use in your name. Additionally, the abbreviation LLC must be included in the name of your LLC in most states. Be sure to check that your name is not already taken or too similar to another LLC in your state. You should be able to do a lookup on the secretary of state’s website for the state in which you intend to register your LLC.

Select your registered agent

Your registered agent is a person who agrees to receive official documents and communication on behalf of the LLC. The registered agent must be at least 18 years old and reside in the state where your LLC is registered. They can be a member of the LLC or a third party, such as a registered agent service.

Register with the state

You will need to file articles of organization, a formation document, with the state to officially create your LLC. The articles of organization document lists important details about your LLC such as:

• Your LLC’s name.
• The LLC’s intended purpose.
• The primary business location.
• Your registered agent’s name and address.
• Management type (whether it’s member-managed or manager-managed).

Create an operating agreement

An operating agreement is more detailed than the articles of organization. It does not have to be filed with the state, but it is used internally by the LLC members. It describes day-to-day operating rules such as:

• Guidelines for LLC management.
• Decision-making processes.
• Dispute-resolution methods.
• Profit-and-loss–distribution percentages.
• Changes in ownership.
• Dissolution process.

Although operating agreements are not required in all states, it is a very good idea to have one in place. If you don’t, the LLC will be governed by the state’s default LLC laws, which may not be favorable for your business.

Obtain an employer identification number (EIN)

An employer identification number (EIN) is an identification number for your business—similar to a Social Security number for a person. It is the number that you will use to file your LLC’s taxes, apply for loans, and open bank accounts. It is required for multi-member LLCs, but you can file for an EIN even if you are the sole owner of your LLC. It offers an extra degree of separation between your business and personal finances. You can easily apply for an EIN using the EIN Assistant on the IRS website.

Benefits of a Real Estate LLC

The primary reason to set up an LLC is to reduce your personal liability from your real estate ventures. However, it is also beneficial if you plan to invest in real estate with others.

Limit your personal liability from real estate ventures

Protecting your personal assets from lawsuits is a great benefit when you are dealing with real estate. For example, assume someone sustains an injury on your rental property. The injured party would have to sue the LLC, and all damages would be paid from the LLC’s assets. Your personal assets, such as your home or retirement account, would be shielded from the lawsuit.

Easily invest with partners

When your LLC owns real estate, you can easily add or remove members through your operating agreement. It is less cumbersome than having to process a deed change every time you’d like to add or remove an investor. The operating agreement can also specify the exact percentage ownership of each member and how to split any profits or losses.

Disadvantages of a Real Estate LLC

Personal liability protection is not limitless because you have a real estate LLC. You may also run into issues if you try to transfer property you already own into the LLC. The cost and complication of registering, maintaining, and filing taxes for your LLC can also add up quickly.

Limitation on personal liability protection

Your personal assets may still be at risk if you “pierce the veil” of limited liability. The veil of limited liability can be pierced for a number of reasons, such as:

• The LLC is intentionally underfunded.
• The LLC member(s) failed to separate their business and personal finances sufficiently.

For example, you should not personally guarantee a mortgage loan in your LLC’s name. It is more likely for this to arise if your LLC does not have sufficient assets to satisfy the damages awarded in a lawsuit.

Due-on-sale clause may be triggered when transferring property to an LLC

If you own property that you want to transfer into your LLC, you will need to look at the exact rules in your mortgage documents. It is possible that the transfer could trigger a due-on-sale clause, requiring you to pay off your mortgage in full at the time of transfer. If this is the case, discuss your options with your mortgage lender to see if it will waive the clause.

Increased expenses and more complicated taxes

Filing fees and ongoing maintenance costs quickly add up when you have an LLC. The filing fees and annual fees required to maintain an LLC vary considerably depending on your state. Be sure to research the specifics in your state before registering your LLC.

Additionally, a multi-member LLC requires an entirely separate tax-form filing every year. An LLC is typically taxed as a passthrough entity—in which the profits or losses are passed through to the members who then pay the taxes due on their personal tax return. (An LLC can also choose to be taxed as a corporation, but that is not the norm.) If you are the only member of the LLC, this is no more complicated than filing your own tax return. However, if your LLC has multiple members, the profits and losses must be split among the members and an informational Form 1065, U.S. Return of Partnership Income, must be filed annually for the LLC.

How to buy real estate with an LLC

To buy real estate through an LLC, you will first need to follow the steps above to set up your LLC. If you need to finance your LLC’s purchase, you may have a hard time finding traditional mortgages. Most lenders do not offer many types of residential mortgages—such as Federal Housing Administration (FHA) and conventional loans—to LLCs. There are financing options for LLCs, but these may require you to have a higher down payment or credit score.

If you already own property that you wish to transfer to an LLC, be sure to check with your mortgage lender. You may have a due-on-sale clause that could be triggered by the transfer to the LLC. Depending on the situation, you may be required to pay off your mortgage loan in full at the time of transfer (unless your lender will waive the due-on-sale clause). You may also have to pay a deed transfer tax, which varies depending on your state.

TIME Stamp: A real estate LLC can protect your assets

Investing in real estate can involve a certain amount of risk. Whenever there is risk involved, it is especially important to limit your personal liability. One way to do that is by setting up a real estate LLC, which protects your personal assets—including your home—if anything were to happen to your real estate investments. A real estate LLC also makes it easier to invest in real estate with other partners. You can research the laws in your state and file your LLC registration yourself, or you can use a website like LegalZoom, which has legal experts who understand the requirements for the different states.

Frequently Asked Questions (FAQs)

Can an LLC own property in Ohio?

Yes, an LLC can own property in Ohio. In fact, as of 2022, state law changes have made real estate investing in Ohio even easier through the use of series LLCs. A series LLC allows multiple assets and “series” of assets—including real estate—to be shielded from legal liability under one parent LLC.

What does LLC mean in American real estate?

A real estate LLC is a distinct legal entity. When you use an LLC for real estate investing, the LLC owns the real estate property, rather than any of the members personally.

Why set up an LLC for investing?

A real estate LLC allows you to buy, sell, and rent real estate under a separate business entity and shields you from personal liability. It may also make it easier to add and remove other real estate investors, if you plan to have partners.