Investing in Real Estate 5: Setting up your LLC
If you own real estate, and I hope you do, do not own it in your own name. Why? Liability and tax consequences. Always have your properties owned by an entity to protect yourself and your personal assets from lawsuits and business debt.
Also, a properly established company structure will offer you tax advantages that you won’t receive if you own the properties personally.
Limited Liability Company – An LLC, or Limited Liability Company, is a business structure that provides limited liability to the company’s actions. It is considered, by many, to be the preferred business structure for landlords. Once a business is formed under LLC structure, the business will have an identity separate from the owners.
Tax Identification Number – Your business will have its own tax identification number identifying the business as a separate tax payer. All transactions conducted by the business will be under the LLC and not under the name of the owner, just like a corporation. A limited liability company provides all the same liability protection as a corporation—but with much less red tape.
Member Managed – Most small business LLCs are member managed. Member managed is the simplest structure and means that every member has authority to act on behalf of the business. If all your members will have direct involvement in the management of the company, then a member managed LLC may make the most sense. Internally, the members will agree on how they and when they will vote on certain LLC matters and agree with each other that they will each not act on behalf of the LLC until the proper votes are obtained.
Manager Managed – A manager managed LLC is generally used when there are “passive” members in the LLC. Passive means the investors do not actively manage or otherwise operate the business of the limited liability company. If your LLC has passive investors, it is usually recommended to have a lawyer between the members and the managers.
With a manager managed LLC, the members, by virtue of being members, do not have authority to manage and operate the business of the limited liability company. Instead, the members elect “managers” and it is the managers who have this authority. It is important in a manager managed LLC that the LLC Operating Agreement have specific rules and processes for the managers to follow when managing the LLC. Their duty is to act in the best interest of the LLC.
The manager can also be a member of the LLC. The only legal restriction placed on who can be the manager of the LLC is that they must be an adult over the age of 18.
Attorney and CPA – Have your LLC set up by a knowledgeable real estate attorney. It is imperative that you are structured properly if you want to be protected and be able to get the most from available tax incentives. Your attorney will spell all of this out in an operating agreement that clearly defines how your business operates. Always consult your attorney and/or CPA regarding available tax deductions for your business.
Which entity structure are you using and how do you know that it’s the best for your company?