Summary: Real estate investors and entrepreneurs who are wondering whether or not to form an LLC – we’ve got you covered today! We’re sharing what a limited liability company is, and how it can help real estate investors stay safe while enjoying some added tax benefits!
Can we chat about a biiiiit of the legal side of real estate investing?
Don’t worry. We promise to make it fun and simple. 😉😉
You see, so many real estate investors don’t know about the awesome perks of forming something called a limited liability company (LLC).
The truth is, that an LLC can be a great thing for investors to protect their wealth and keep their earnings safe and sound. That’s why we’re here to shed some light on exactly what a limited liability company can do for you and your investments.
Knowledge is your ultimate key to investment success and financial growth, right? So, let’s chat about the potential benefits and drawbacks for forming an LLC. Whether you’re new to investing, or have tons of experience, you’ll find everything you need to decide if an LLC is the right choice for you and your investments. 👌
Here’s what we’re covering ⏬
- What exactly is an LLC?
- Benefits of forming an LLC as an investor
- Top 4 tax advantages of investing through an LLC
- Are there any drawbacks to forming an LLC?
- How to know if forming an LLC is the right move for you
What exactly is an LLC?
You know how you, as an individual, can make all sorts of business and personal decisions for yourself? Well, in some cases, it miiiight be in your best interest to separate the personal decisions from the business decisions.
That’s where a limited liability company comes in handy.
An LLC allows you to invest in real estate as a business entity, instead of an individual. Forming an LLC gives you that sweet spot of having less personal liability in investing, while also allowing you to stay in control of the profits earned. Plus, you can invest with other investors under the protection of an LLC, making bigger investments more accessible.
Before we go deeper here, we just want to make one thing clear. See, we get this question sometimes, so we’re going to go ahead and answer it now…
Do you HAVE to form an LLC to enjoy passive income through real estate investing?
The answer is no. You can still make money without an LLC, butttt there are some big reasons why you might really WANT to form an LLC – for things like tax benefits, asset protection, and more. Essentially, an LLC can be a great way to save and keep your money, while you work towards growing long-term wealth. 🤩🤩
You know us. We want you to have all the info for how to optimize your investment success on the way to financial freedom.
Let’s look at the different ways an LLC can be beneficial for you as a real estate investor.
Benefits of forming an LLC as an investor
➡️ LLCs provide personal liability protection
You know how much we care about helping you protect your wealth and assets, right?
Well, if you didn’t know…now you do!
This first benefit is HUGE, because safeguarding your finances brings peace of mind while investing, and also gives you the ability to continue multiplying the wealth you have.
Sometimes investing can be risky. That’s just a fact. So, by separating your real estate investment holdings from your personal assets with an LLC, you can make sure any debts or legal actions don’t affect your personal finances.
➡️ LLCs have a simple, flexible management structure
This second benefit is what makes an LLC very attractive for individual investors, entrepreneurs, and small business owners. There’s a lot more room for customizing the business structure of an LLC than in, say, a large corporation.
Instead of being governed by a board of directors and strict regulations, an LLC can be formed pretty easily, and managed by whoever you want (as long as they’re listed in the operating agreement).
So, you can keep control of your LLC, or delegate managers of your choice. The cool thing is that you have the freedom to choose how management is structured – giving you plenty of flexibility throughout the process.
➡️ LLCs give you lots of tax benefits
This one is very exciting, because tax benefits are literally our favorite things to talk about.
Honestly, what’s not to love about saving TONS in taxes?? 😏
As far as the pros of forming an LLC go, the tax advantages really take the cake, thanks to what’s called a pass-through taxation. This basically means that the LLC members claim all of the investment profits and losses in their personal taxes – which usually leads to significantly lower taxes overall.
And get this…that’s not even the best part. Being able to save money on taxes is just the start of the tax advantages we’re about to discuss. There are actually 4 main ways investing through an LLC helps you out when it comes time to pay your taxes.
Top 4 tax benefits of investing through an LLC
✔️ You get to choose how you want to be taxed
Flexibility is a really incredible thing in keeping your taxes low. With an LLC, you actually get to choose how your profits get taxed – whether it’s as a sole proprietorship, partnership, or C-corporation, or S-corporation.
This type of freedom is unique to investing through an LLC, and gives you the ability to decide what will be most beneficial to you based on your own personal circumstances.
✔️ No need to worry about double taxation
Choosing how you get taxed also helps you avoid the dreaded double taxation that happens when paying taxes as a corporation. This happens when owners of a corporation pay taxes on the business profits, and THEN pay taxes on their personal returns as well.
Paying taxes once is enough. Noooo one wants to be paying double, right? Operating under an LLC gives you that pass-through perk we talked about earlier – which also gets rid of the double taxation issue.
✔️ You can qualify for QBI – Qualified Business Income deduction
This special deduction came about with the Tax Cuts and Jobs Act of 2017, and is a great way to save some extra money each year. The QBI deduction allows LLCs, sole proprietorships, partnerships and S-corps to claim deductions on up to 20% of qualified business income.
As far as tax deductions go…that’s a BIG help. 😎
✔️ Pay less in taxes with lots of business deductions
We’re sure you already know about business deductions. They’re kind of the best, right? Well, with an LLC, you get to write-off tons of different things to offset your investment return taxable income.
See, if investment returns are considered personal income, you can’t really write-off too many expenses. BUT as an LLC, your investment expenses are considered business expenses – which means hellooooo deductions! 🙌
Are there any drawbacks to forming an LLC?
Of course, we can’t JUST talk about the benefits of forming an LLC, and not touch on a couple potential drawbacks, as well. 😍😍
We try to give you both sides of every single coin, you know? Because this is YOUR life, and you get to choose exactly how you want to live it – always. That includes deciding for yourself if an LLC is the right move for you and your real estate investing activities.
There honestly aren’t a lot of drawbacks, but we do want you to be aware of two main things – The “due on sale” clause, and the transfer obligation tax.
The “due on sale” clause comes up when a property is being transferred from an individual’s name to an LLC.
You just want to make sure that the name on the property insurance documents match the name of the person the property is being transferred to. If not, there could be a mortgage terms violation.
But, as long as you know this in advance, you can usually work around it with a waiver from the mortgage lender.
There could also be a transfer tax when transferring properties through an LLC. This is different for different states, so be sure to learn your own state’s tax laws to get an idea of how it works when real estate ownership changes.
We alllllways say to hire and consult with your own tax professional to stay on the safe side of tax laws.
How to know if forming an LLC is the right move for you
Well, there you have it – the main pros and cons of real estate investing through an LLC. ⭐
As we mentioned before, you can choose whether or not to form your own LLC, based on your goals and investment style.
Here’s how we see it.
If you have personal assets (properties, businesses, etc.) that could potentially be dragged into any investment debts or legal action, an LLC is a great option for keeping your personal life separated. Also, if you like flexibility and savings in the form of tax benefits, an LLC mayyyy be the way to go.
You have lots of options when it comes to real estate investing. We’re just here to help make it all simpler and more accessible, so you can actually reap the awesome benefits and grow your wealth. 💰
We’re here for you.
Have questions about LLCs, or how to navigate other parts of your real estate investing journey? We’d LOVE to chat with you! Just send us a message, and we’ll help you get started on the path to investment success. ✨
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