3 Reasons to form an LLC for your Real Estate Investments

Investing in real estate can be profitable. It also has potential risks. Regardless of why you want to buy real estate, many people - especially investors - choose to form a limited liability company (LLC).

LLCs have become one of the most popular business entity types for acquiring real estate. Owners often prefer to form an LLC when purchasing real estate—or when transferring title to real estate from an individual to the LLC—so that the LLC becomes the legal owner of record and not the individuals.

3 Reasons to form an LLC for your Real Estate Investments:

1) Limitation on Personal Liability

As an owner of real estate, you want the best option for limiting your exposure to personal liability should an unforeseen circumstance arise relating to your property. LLCs provide that protection.

For example, if someone is injured while a guest at a property you own, even if you do not reside there or have any connection to the guest, it is not uncommon for the guest to pursue a legal claim against the property owner for their injuries.

Assuming you acquired property insurance to cover such incidents, your homeowner's insurance policy would provide coverage up to a particular monetary limit. However, if the amount of damages the injured party seeks exceeds the policy limit, your personal assets could be exposed. Even if you successfully defend the claim, your insurance premium could increase simply because your property was subject to a lawsuit.If, on the other hand, you placed the deed and title to the property in the name of an LLC, only the LLC (and not you) would be named as a defendant.

More importantly, only the LLC's assets would be obligated to pay an award of monetary damages if the injured party's suit is successful. Hence you are provided anonymity—and your personal assets are not exposed.Another reason to put title in the name of an LLC is that it gives you liability protection from monetary judgments if a financial dispute involving the LLC arises. For example, let's say the LLC enters into a contract to sell its primary building to a third party, but then decides not to complete the sale.

The third-party buyer could file a breach of contract lawsuit against the LLC and seek damages or attempt to force the sale of the property.If the third party is successful in obtaining a monetary judgment, the third party cannot, as a judgment creditor, force the sale of real property held by an LLC as a judgment debtor. Instead, the judgment creditor is generally required to obtain a "charging order" from the court which, in turn, becomes a lien on the real property. While this is by no means a cause for celebration, it is better than losing the property completely.

The remedies available to creditors vary from state to state, so be sure to review the applicable state law. Members of LLCs who own real estate as part of their investment portfolio receive favorable tax treatment from the Internal Revenue Service.Whether you are the sole owner of the LLC (single member LLC) or one of several members (multi-member LLC), you benefit from what is known as indirect taxation.

For federal income tax purposes, indirect taxation refers to the fact that any income earned by the LLC - including profits generated from real estate (such as rental income from the rental of property owned by the LLC) - will be passed through the LLC to its individual members. Any income earned by the LLC is not taxed at the corporate level (as would be the case with a traditional corporation) but only at the individual level. Each member of the LLC reports the income on his or her individual federal income tax return, generally on Schedule C. These pass-through rules allow members of an LLC to avoid double taxation.

2) Businesslike Appearance

An intangible benefit of owning and holding real estate in the name of an LLC is that it appears to the public to be more "businesslike," especially when advertising a property for lease to commercial or residential tenants.

An individual or business looking to lease property may be more comfortable renting a piece of real estate from "Johnson Invest LLC" than from "Mike Johnson" individually.

3) Ease of Transferring LLC Interests

An LLC can be sold by a relatively simple transfer of the membership shares. The real estate of the LLC will continue to be owned by the LLC, but with new members of the LLC as crew. Continuity is therefore preserved and the transfer is seamless.

Article by Thomas Rogge