Forming a Real Estate LLC: 7 Simple Steps
What is a Real Estate LLC?
Compared to other investment vehicles, investing in real estate offers multiple lucrative advantages. However, it can also expose real estate investors to risks and pitfalls they never knew existed. One way to help mitigate this risk is by forming a real estate LLC (limited liability company.)
An LLC for real estate is an established legal entity that allows investors to purchase and own real estate in such a way that protects them from personal liability. This means that every purchase and sale done by the investor is conducted in the name of the LLC rather than the individual. If any outside entities or individuals make a claim, the individuals behind the entity can avoid personal liability. Also, property owners are allowed to establish individual LLCs for each separate property, meaning that they can avoid cross-liability between properties.
A real estate LLC is a corporate structure that aims to not only shield you from lawsuits if things go awry, but also protect your personal assets such as a home, personal bank account, or investments. Forming a real estate LLC separates the investor and their respected business to be viewed as two separate entities. This helps to protect them from being personally liable in case of debt or lawsuit from the business. Along with protection, a real estate LLC offers unique tax advantages to investors, as well as the flexibility to accommodate their growing business demands.
I Want To Set Up an LLC - Where Do I Start?
1. Decide on a Business Name
When creating a business, marketing may be your top priority as you consider names for your business. And while it’s important to choose the right name for branding purposes, there are state law requirements that your business name but follow.
In general, state laws won’t allow you to choose a business name that’s already being used by another business in your state. Most states also prohibit certain suggestive words that might imply you’re in a certain business, such as insurance or banking. Additionally, you will most likely have to include “LLC” or “limited liability company” at the end of your business name.
You can review your state’s LLC naming requirements and find out if the name you want is available by visiting the website of the state agency responsible for business filings. In most states, that’s the Secretary of State.
2. Designate a Registered Agent
Every state requires LLCs to have a registered agent. A registered agent is someone who receives official or legal documents (such as subpoenas) on behalf of the LLC. Once received, the registered agent will then pass on these documents to the person in charge of the LLC.
Anyone 18 years or older can be a registered agent—and you’re allowed to name yourself or an employee. However, the agent must be available at an address within your state during normal business hours. You can also designate a company that provides registered agent services for an additional yearly cost.
3. Get a Copy of Your State’s LLC Article of Organization Form
To establish your LLC as a legal entity, you will need to file a document with the state agency that handles business filings in your state. Typically in most states this document is called the articles of organization, but some states use a different name, such as a certificate of formation. Each state has a form you can use. To find your state’s form, go to the same website you used for business name research.
4. Prepare the LLC Article of Organization Form
Each state will list its specific requirements and procedures for those trying to form an LLC.
You will need to provide the following information:
Your business name
The address of your principal place of business
The purpose of the business
The way your LLC will be managed
Contact information for the registered agent(and in some states, the agent’s signature)
The duration of the LLC
When that’s complete, one or more business owners or organizers will need to sign the form.
Some states, such as Nebraska and New York, require you to publish a notice in the newspaper indicating your desire to register your LLC. This step needs to be completed before filing the articles of organization.
You can review your state’s LLC naming requirements and find out if the name you want is available by visiting the website of the state agency responsible for business filings. In most states, that’s the Secretary of State.
5. File the Articles of Organization
To file the Articles of Organization, you’ll need to pay a filing fee. In order to avoid having to pay this fee more than once, be sure to check the documents carefully for error before submitting.
When your formation documents are approved, you’ll be issued a certificate by the state to indicate your LLC is formally registered. Use it for other necessary tasks such as setting up a business bank account and getting a tax ID number.
6. Create an Operating Agreement
An operating agreement contains the details of the financial, legal and management rights of all members of the LLC. More specifically, it can include how profits will be distributed, how members leave the LLC and who contributes capital for the business. In essence, it should contain all relevant information pertaining to the operations of your LLC.
The Operating Agreement isn’t required in all states, but it is still advised to create one to make sure all members of the LLC agrees on their designated rights and responsibilities. Even solo business owners will benefit from outlining the details in writing.
You can create the operating agreement on your own. There are numerous free templates to be found online to be your guide. For more complex situations such as LLCs with multiple owners, hiring an experienced attorney may be well worth the expense.
7. Keep Your LLC Active
Setting up your LLC is only the start. Once it’s formed, you’ll need to ensure your business remains in good standing with your state. Again, refer to your state’s business filing website to look up current information on how to do so. You may need to file an annual report that updates information pertaining to your LLC and pay an annual filing fee.
