Creating an LLC (limited liability company) is a good decision for real estate investors to own and manage their holdings. Investing in real estate comes with legal complexities and risks, and the ownership structure of an LLC will manage these risks and hedge against the potential for personal loss.
As a hard-money lender in the Los Angeles area, I want future clients to know and understand the advantages and protections of the LLC structure.
What is the LLC Structure?
An LLC is a pass-through entity that separates an investor’s personal and business assets. The LLC entity is not taxed. Instead, any tax owed on the net profits is passed through the entity to the individual investor. There is not the double-tax standard like a corporation.
The LLC protects the personal assets of the investor. Should an LLC be sued or held liable for an obligation, the holder of any judgment can only look to the business assets for relief.
LLC vs. Sole Proprietorship
A sole proprietor has complete control over the business assets and operations. However, the investor’s assets will not have the protection of asset separation. Should a claim be filed against a sole proprietor, all personal and business assets will be subject to the satisfaction of a claim.
LLC vs C-corp
A C-corp will protect a shareholder’s assets from those of the business should a claim be brought against the entity. But a C-corp is not a pass-through entity.
Income taxes will be due on the earnings at the entity level and again at the shareholder level when dividends are distributed. This is what is meant by double taxation.
LLC is Best for Real Estate Investing
The LLC structure is a straightforward process to form and manage. There are online services to form and maintain an LLC at the state level. The costs for creating this entity are low when compared to the value of the protections.
The advantages of this structure to an investor are:
- easier access to capital, and
- investing with partners.
As mentioned earlier in this article, an LLC is a pass-through entity. There will not be any tax liability at the entity level. Although the net profits are taxable, the liability is passed through to the investor and taxed as income on the 1040.
Any losses will reduce the investor’s overall taxable income.
The taxable profits shown on the investor’s 1040 will be net of operating expenses, mortgage interest, and depreciation relative to the underlying asset.
This flexible business structure can be tailored to an investor’s needs. The LLC can be an entity of one or many. The entity’s manager can be either the owner or a third party designated by the owner. Any costs associated with the entity’s management can be deducted as an operating expense.
Access to Capital
Private lenders offering hard-money loans in Los Angeles prefer lending to single-asset LLCs. From the lender’s perspective, LLCs are less risky than individual borrowers and offer stability through the loan term.
Investing with Partners
The LLC structure is a simple process to add an equity partner as another owner. The process involves an amendment to the operating agreement and the organizational documents filed with the Secretary of State. There are no requirements to change a deed, and often will not require amendments to the loan documents.
Managing the LLC for Real Estate Investments
The management of an LLC is as straightforward as its formation. An investor must keep the assets in the portfolio as separate investments owned by different single-asset LLCs. Each entity must have an operating agreement and maintain separate records, bank accounts, and insurance policies.
The LLC structure is the best choice for real estate investors wanting to protect their personal assets and avoid double taxation.
If you are considering a hard-money loan and have questions regarding the LLC structure, you must work with a reputable and respected hard money lender in Los Angeles. PB Financial Group is a premier, direct hard-money and bridge lender that has provided quick funding since 2007 and has closed over 2,700 loans. We aim to satisfy your financing needs efficiently.
PB Financial NMLS #357614/DRE #01522495