The Glitz and Glamour of the LLC

LLC FormationI spent some time at an REI event the other evening and had the opportunity to speak with a number of newer investors. During the discussion I found that nearly all of the attendees either had formed or planned to form an LLC or corporation for their Real Estate investing business. As we talked, I found that most of these newer investors could not site a specific reason why they’d formed the entity. If you aren’t sure whether you need an LLC for our Real Estate business or not, here’s some unsolicited advice.

What exactly is an LLC? A limited liability company is a business structure that can be treated as a small business, partnership or disregarded entity for tax purposes. Individuals and businesses might choose an LLC to limit their liability to the assets of the entity and separate personal and business income.

Who needs an LLC? Well that depends.

If you are purchasing property, you may want an LLC.

I know investors who form a new LLC for every property they purchase. The argument is that each property is protected, and so are non-business assets. If a resident falls on the stairs and they sue, any settlement would be limited to the value of the rental. Likewise, if one of the properties has a violation, or judgment lien, it will not affect other property investments.

On the flip side of the argument is the wealthiest investor that I know. He holds over 750 properties in his personal name. His kryptonite against lawsuits is a good insurance policy, and his security against other liens and violations is the well oiled machine of his business. His properties are well maintained and the bills are paid. Problem solved.

If you are a wholesaler and have no intention to purchase or take ownership of an investment, you probably do not need an LLC.

So why do so many investors decide to form business structures? I did it to create a separation between my business and personal finances. It is a lot easier to track deductions and costs associated with your business if they aren’t co-mingled with your personal mortgage payment. Neither is the IRS if you are ever audited.

I’m not an attorney or an accountant. I leave those jobs to people much smarter than I. As such, I always recommend that you consult professionals to discuss the impact that forming a business entity could have on your business. Make sure you have a reason for your decision t move forward.