If you are contemplating your next (or first) investment property, it is worth taking a moment to consider what ownership structure makes the most sense for your investment. We have previously discussed the benefits and limitations of land trusts. In this article, we examine the limited liability company (LLC) as an option for holding your real estate investment.
Benefits of Using an LLC for Your Real Estate Investment
Like land trusts and the other options available, LLCs have a number of benefits when it comes to real estate investing. Some of the key benefits (and corresponding limitations) include:
1. Limited Personal Liability
When properly formed and managed, an LLC can insulate the owner (or owners) from personal liability in the event that someone suffers an injury on the property. An LLC can also potentially shield you from personal liability for mortgages and other loans taken out in the name of the company – though you need to understand whether your lender is asking you to sign a personal guarantee.
Most banks and mortgage companies will not lend to a newly-formed LLC without a personal guarantee. If you sign a personal guarantee, your lender will be able to seek repayment from you personally in the event that the LLC is unable to meet its obligations.
2. Pass-Through Taxation
By default, LLCs are subject to what is known as “pass-through” taxation. This means that the owners report the LLC’s income on their personal tax returns. This is a simpler form of taxation than applies to some types of corporations, which can be subject to a form of double-taxation.
Importantly, while pass-through taxation is simpler for reporting purposes and usually results in the lowest tax burden for small companies, it will not necessarily be the option that leads to the least amount of tax. Under some circumstances, the corporate double-taxation structure can actually result in less overall income tax liability for the owners of the company.
3. Simpler and More Flexible Management
Among the options available, LLCs typically have the simplest and most flexible management structures. The initial and ongoing formalities with LLCs are less burdensome than those that apply to corporations, and the owners of an LLC have the option to either manage the company themselves or appoint managers who will be responsible for the company’s decision-making and day-to-day operations.
Closing Remarks: Liability Insurance
Whether you choose to own your real estate investment personally, through an LLC, or through some other type of entity, it is generally advisable to purchase liability insurance to protect your assets or the company’s assets in the event that something goes wrong. However, liability insurance is not a fail-safe: If there is a major incident, your insurance may not cover the full extent of the damage. This could leave you or your company financially exposed.
By forming an LLC and purchasing liability insurance, you can create multiple layers of protection for your personal assets. To learn more about risk mitigation strategies for your real estate investment, we invite you to contact us for a consultation.
Blado Kiger Bolan, P.S. | Tacoma, WA Business and Real Estate Lawyers
The attorneys at Blado Kiger Bolan, P.S. provide experienced legal representation for real estate investors in Tacoma, Washington. For more information about the benefits and limitations of LLCs, and to find out if an LLC makes sense for your real estate investment, call (253) 272-2997 or contact us online today.