As an investment property owner, one of your primary duties is to ensure that your Plano property well-maintained and protected. To avoid exposing yourself to risk, you can opt to create your own business entity to separate your operational real estate from your home or other assets. As a Plano property management expert, we know that your ultimate goal is long-term income and stability through property—you can't achieve this goal if what you own is subject to a lawsuit!
However, if you want to shelter your holdings correctly, you will have to choose the right structure for your real estate business based on your needs and the benefits it offers. One option that many investors choose when they begin building a portfolio is an entity structure known as an LLC. Given that this is the most common business entity we see among small-scale investors, we wanted to dive into this structure with a bit more depth.
Here is what you need to know about creating an LLC to protect your Plano portfolio!
Please note: This article is not legal counsel! When you need real-time assistance, reach out to the experts at RentHub Property Management or a skilled attorney.
What Is an LLC?
A Limited Liability Company, commonly known as an 'LLC,' is a legal business structure that offers the benefits of both a partnership and a corporation. Incorporating your business via an LLC makes it its own legal entity, separate from you as a Plano property owner.
As such, the company can have its own:
- Bank account
- Tax ID number
- Umbrella of liability
And can conduct relevant rental business under its name. Ultimately, this serves to shift responsibility away from you as the investor and Plano property owner and towards the business entity you've created.
You can enjoy the benefits of creating an LLC regardless of whether you own one or several properties. The good news is that you can create the LLC either before or after acquiring rental property. However, as a Plano property management expert, we recommend that this should be a step taken by investors before they ever set pen to paper on acquiring holdings.
Benefits of an LLC Versus Other Types of Legal Entity
There are many ways to structure your new business beyond that of a Limited Liability Company. You could also select a Sole Proprietorship (SP), Limited Partnership (LP), or even a corporation. However, for investors just getting started in Plano real estate, the following are reasons why you're likely to choose an LLC structure over these other options.
- The most obvious advantage of selecting an LLC is that it helps you limit your personal liability.
- In the event someone files a lawsuit against you, only the assets owned by the LLC will be at stake.
- This means your separate assets and finances outside of the business will be protected from the legal claims.
Additionally, since the person suing may go after the assets collectively owned by the LLC, you may want to have a separate LLC for each of your properties if you have several.
Selecting an LLC for your Plano real estate will also enable you to enjoy the benefits of pass-through taxation. Unlike a corporation where both the company's profits and owners' income are taxed, LLC taxes will not be paid directly by the business. Instead, the company's income will be passed through to the business owners and taxed as the individuals' income. Pass-through taxation allows you to avoid double taxation, effectively reducing the amount taken out of your income as taxes.
An LLC is a separate business entity from the Plano property owners who formed it. By separating business from personal finances and records, investors will be better positioned to stay organized and manage their rental properties as a business.
Also, an LLC can have its own bank account, meaning you will be able to easily keep business transactions separate from personal ones. Separation of funds will make it easy to better manage business finances, maximize tax advantages, and get a clear picture of business performance.
Greater Management Flexibility
Compared to a partnership or corporation, an LLC offers more flexibility when it comes to management. Unlike corporations where the law requires the company to have officers and directors, LLCs can be managed by the owners or by a third-party Plano property management partner. This business structure also provides flexibility in the distribution of profits. The manner in which the profits generated by the company are shared will depend on what is contained in the LLC's operating agreement.
Easier Transfer of Ownership
A real estate S corporation will place restrictions on foreign ownership and investment while an LLC provides room for such ownership. The ease of ownership transfer is particularly important when you want to purchase an investment property with a partner.
It is also possible for LLC owners to gift their interests to their heirs each year, effectively transferring their ownership in the business. In essence, owners can pass their entire ownership to their loved ones easily while avoiding the costly fees and taxes associated with such transfers.
Protecting Your Assets Protects Your Income!
Every rental property owner acquires real estate with the goal of maximizing their rental income and minimizing expenses and risks. Considering the advantages that an LLC business entity provides, you should consider this type of structure for your real estate business. However, your mileage will vary depending on what kind of portfolio you have.
Forming a business entity isn't the only way to protect your holdings, either. There are so many other fine details that Plano property owners need to target to secure their income! Learn more with your free copy of our resource, Protecting Your Investment Property: A Guide!