4 Reasons You Need an LLC for Your Investment Properties
An important consideration when starting to invest in real estate is considering the best legal structure for your investments. We usually advise people to form an LLC for their investment properties and this blog post will explain why.
What Is an LLC?
LLC stands for “limited liability company.” An LLC is one type of legal entity that can be formed to own and operate a business. LLCs combine the best parts of corporations, sole proprietorships, and partnerships into one business entity offering owners liability protection, flexible management structure, and certain tax advantages.
You can create an LLC by yourself, with a partner, or with a group. If you own an LLC, you are a “member” of the LLC. LLC’s are regulated at the state level, so the process of creating an LLC will differ by state.
What Are the Benefits of Creating an LLC for Your Rental Properties?
1. Limit Your Liability
If you own your property as an individual and someone files a lawsuit against you, then your personal assets are at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.
2. Protect Your Assets
In addition to separating the rental property from your personal assets, you should also, consider separating your rental properties from each other. If you own multiple properties, you can “insulate” each property from liability claims by setting up separate LLCs for each property or small groups of properties. This way, if someone files a lawsuit pertaining to one of your properties, the rest of your properties will not be affected by the lawsuit.
3. Pass-Through Taxation
Pass-through taxation is another benefit of LLCs. Normally, a corporation is taxed directly on its profits, and owners are taxed again when they make income from their business.
With an LLC, you get the benefit of the company’s income “passing through” to you as the business owner. Essentially, all income made by your LLC (your rental property) will flow through to your individual income tax return. This minimizes the amount of money taken out of your income for taxes. This will also provide you with several other tax benefits, but that will be the subject of another blog post.
4. Separate Business and Personal Expenses
When you create an LLC, you should create a separate bank account for your LLC. That way, your personal expenses are separated from business expenses. This makes it easier to claim business expenses when it comes time to do your taxes. Separate bank statements make it clear which expenses are business and which are personal.
LLCs are not the only legal structure that owners can use to purchase and protect their rental properties, but they are probably one of the easiest and most advantageous for people to set up. If you are starting to invest in real estate, it might be a good idea to get your LLC established.
Company Updates
This week we welcomed a new member to the Duratus Properties Team! Lilliana Alvarez is joining us as our new Marketing Manager. She will be overseeing all of our digital marketing efforts including managing our social media platforms, editing our bi-weekly newsletter, and helping us launch a podcast in 2022.
We also had two closings this week for our properties at:
105 Montclair Loop, Daphne AL 36526 ⬇️
17 Monte Tierra Trail, Alabaster AL 35007 ⬇️
