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Everything You Need to Know About Creating a Real Estate LLC

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A real estate partnership may serve as an investment strategy for your business. With the help of a real estate limited liability company (LLC), you can purchase, sell, and lease property without being personally involved. Hence, you must set up an LLC to protect your company from liability and separate your personal and commercial assets.

What are the steps in creating a real estate LLC?

Here are the essential steps to form and maintain this specific business structure:

  1. Research state specific regulations

How do you structure a real estate partnership? First, look up the specific regulations of the state where you’ll be setting up your business. Each state may provide different regulations for LLC or partnership formation. If you are interested in starting your LLC, you should check state regulations and laws.

Many business owners register their LLCs in Nevada because of the competitive property tax rates, asset protection, affordable fees,  short processing times, and robust corporate privacy protection.

  1. Choose a name for your real estate LLC

To proceed with the formation of LLCs, business owners must first think of a name that complies with the naming regulations of the state they are in. 

For instance, if you are forming an LLC in Nevada, your company name must contain the terms Limited Liability Company or LLC in accordance with state law. The acronyms Ltd., L.L.C., LLC, or LC are also acceptable. Company, meanwhile, can be abbreviated to “Co.”

  1. Seek a registered agent

Next, you must appoint a registered agent to assist you regarding legal agreements. Legal documents should be delivered to your agent within business hours to prevent a default judgment.

A registered agent in Nevada should at least have a street address in the state, but doesn’t have to be a resident. The agent will be your point of contact for all state government correspondence, including tax forms and lawsuit notices.

  1. File the articles of organization

Among the crucial documents you must have for your real estate LLC are the articles of organization. The LLC, registered agent, management, and each member of the company should all have names and addresses in these files. The date of dissolution, if any, should also be specified in the articles of organization.

If you are forming a real estate LLC in Nevada, you must send the articles of organization to the Nevada Secretary of State as soon as you have the name and agent of your LLC. Take note that Nevada collects a $75 filing fee.

  1. Write an operating agreement

Although most states do not require an operating agreement from an LLC, it’s still a good idea to prepare it for your business. An operating agreement describes the operations of your company, including a comprehensive description of the obligations of each member. Moreover, it demonstrates how the LLC will be run as a separate legal body.

Without an operating agreement, state laws will decide the management of your company. It is a fundamental element of any LLC structure because it aids in the settlement of any monetary disputes or potential legal issues.

  1. Obtain licenses and permits

A Certificate of Existence or Good Standing attests to the legal existence of your corporation. It also displays your current costs and documentation. Certificates may be processed online for around $50.

  1. File annual reports

You must also submit annual reports to update your basic company information, like the names and addresses of the founding members and managers. These documents ensure that your business complies with state regulations and maintains your limited liability protection and tax advantages.

What are the benefits and disadvantages of real estate LLC?

Here are some factors you must consider before creating a real estate LLC.

Pros

  • Limits personal liability

An LLC protects the assets of its members to a certain degree. For example, if someone got injured on your property, that person may only sue the company. Hence, the plaintiff may only come after the business and not after the personal property of the defendant. Failure to make payments will incur the debt in the LLC’s name instead.

  • Reduce taxes

Real estate LLCs are subject to pass-through taxation, which simply taxes your personal income on a Schedule D form. As a result, you won’t be required to pay a separate corporate tax as you could with another business form.

If you use your LLC to manage rental property income, you might be able to deduct 20% of that amount from your personal income taxes.

  • Better loan terms

You can usually get better loan terms and interest rates if you have an LLC than if you were borrowing as an individual. However, mortgage lenders may still consider the credit risk of your company when you apply for loans.

Cons

  • No complete liability protection

There are times when you can still face legal trouble even if the LLC provides an extra layer of security. If you serve as the guarantor of transactions, entities can come after you if the company goes into default. If you fail in your duties to settle these transactions, courts can hold you accountable for losses incurred.

  • Expensive formation and maintenance

Real estate LLCs require hundreds of dollars to continue their existence. For instance, California requires at least a $100 formation fee and an $800 annual tax.

  • May trigger the due-on-sale clause

You must be cautious if you want to transfer properties into your real estate LLC. Changing the property owner’s name can cause a due on sale clause, which will lead the lender to demand the remaining balance of the property’s loan. 

If you fail to settle the payment, they might be able to foreclose the property. In order to bypass this, you should ask your lender to waive this clause before proceeding with the transfer.

Form your Real Estate LLC with Ease

An LLC status provides several benefits to your real estate business. However, the formation process may be complicated for new business owners. Ask our business professionals at NCH for assistance and professional guidance.

NCH has been in the industry for more than 30 years and has helped thousands of entrepreneurs. Our specialists can help form your real estate LLC, so you can focus on growing your company. With NCH’s legal, tax, and formation services, you can get help in resolving your company’s legal issues, preparing tax returns, and minimizing your tax exposure for a well-structured real estate business.

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