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Should you form a real estate LLC?

On Behalf of | May 25, 2021 | Business formation

There’s been a significant uptick in people getting into the real estate industry as investors in recent years. Some investors have done so to fix and flip properties, whereas others have opted to build their portfolio of rental properties.

California requires individuals to form a real estate limited liability company (LLC) when working with properties in the above-referenced scenarios. You may want to apprise yourself of what sets an LLC apart from other business structures before forming one.

Many business owners incorporate their business concept as an LLC. They do so for many reasons. Business owners enjoy personal liability protection from their company’s actions.

Owners enjoy pass-through filing status, meaning that they can file include their company’s profits and losses on their personal income tax return. LLCs are also generally less regulated by the government than other business structures are.

Why a real estate LLC may not be the best option

There are a few details associated with real estate LLCs that many business owners find unattractive. These include the following:

  • There are added costs associated with running an LLC versus a sole proprietorship.
  • Creditors can find in-and-arounds for holding you personally liable for your company’s debts.
  • Real estate LLCs dissolve if you die or file bankruptcy, making it challenging to pass on such an asset to others if you wish.

As with anything, there are strategies that you can employ to work around the impasses that forming a real estate LLC poses.

Is forming a real estate LLC right for you?

One of the more challenging tasks to handle as an entrepreneur is sorting out the differences between one type of business formation and the next. An attorney will likely want to know more about your business, including its expected workforce and revenue, before advising you which corporate entity is best for you and your operation.