Ms. Conway is an attorney with the Indianapolis law firm of Thrasher Buschmann & Voelkel, P.C. and represents investors, property managers, real estate agents, commercial and residential landlords and tenants, contractors, builders, building trades and lenders. This article is an overview of the LLCs as it relates to real estate investors, and is merely educational, and should not be considered legal advice. Each reader’s circumstances will differ. Readers should seek their own legal counsel and should not rely on this article to conduct their affairs.
A lot of real estate investors have probably heard that they need to set up an LLC for their real estate investments. This article will help answer what an LLC is and why you, as a real estate investor, need one.
What is an LLC?
The most common limited liability entity used by real estate investors is a limited liability company (“LLC”). LLCs allow the asset protection of corporations with the pass-through taxation of partnership. LLCs are also relatively simple to form and simple to maintain. When used correctly, an LLC can provide you and your personal assets protection from liability in the event of a lawsuit.
LLCs are useful because of their flexibility and can have anywhere from one member to thousands of members. They are also unique in their ability to allow for investors to structure the management and payout of its members, while still maintaining the taxation as a pass-through entity (more on that later). Also, there is no restriction on who can be a member of an LLC.
What type of LLC should I consider?
Though LLCs do allow for a lot of flexibility, most real estate investors do not need an overly complicated LLC. Most real estate investors need a simple LLC that serves to protect their assets in the event of a lawsuit. But even the simplest LLC should include an Operating Agreement – which is the document which governs the way the LLC is run and how the profits and losses of the LLC are allocated. The Operating Agreement can also serve to provide how ownership interest can be transferred from one LLC member to a third party.
As provided above, an LLC is a pass-through entity. This means the taxation of LLCs is relatively simple, with all the income and loss flowing through to the member’s own personal tax returns. In the instance of a single-member LLC, a separate tax return is not even needed. Though, an investor always needs to consult their tax advisor regarding whether a separate tax return should be filed.
Using an LLC for asset protection for real estate investors
I have talked a lot about asset protection – so what does that mean? Asset protection means that if the LLC is the owner of real estate, then the LLC would be sued in the event of a disgruntled tenant or a slip and fall. If the LLC then loses such lawsuit the LLC could be liable for the damages. Since the lawsuit would be against the LLC rather than the individual, the individual would not worry about their personal bank account or personal assets being seized in the event of a negative judgment – only the assets which are part of the LLC would be at risk. Please do not read this as the LLC being bulletproof. The outcome of each situation may be different.
If you have other questions or concerns about LLC’s, please feel free to contact Ms. Conway for a consultation.
Laura B. Conway, Esq.
151 N. Delaware Street, Suite 1900
Indianapolis, IN 46204-2505
p: (317) 686-4773
f: (317) 686-4777