Forming a Real Estate LLC: Everything You Need to Know - MarketWatch (2024)

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An LLC is a business structure that can have a single member (SMLLC) or as many members (multi-member LLC or MMLLC) as it wants. The income generated by the LLC passes through to the members who pay taxes on the income annually. The LLC itself doesn’t pay taxes on its income. The LLC holds its own assets and is considered a separate entity from its members.

A real estate LLC is a company that is formed to hold, buy, sell and rent real property (e.g., homes, apartments, corporate buildings or rental spaces) that earns a profit that is passed through to its members. The LLC holds all the liability risk on behalf of the members.

For most entrepreneurs looking to start a real estate LLC, their goal will be to protect their personal home while still investing in other real property to earn a profit. Even if you haven’t yet amassed a large personal wealth, starting off your investment journey by creating an LLC is a great way to prepare for the future and create built-in protection.

The main advantage to starting any kind of LLC is the separation it provides between personal and business assets. For those looking to purchase, sell or rent real estate, this is an easy way to limit personal liability when making high price transactions.

The main disadvantage to starting a real estate LLC occurs if you already own the property that you want to be held by the LLC in your personal name. In other words, you’re looking to transfer personal property to the LLC. In some circ*mstances you may need to “sell” the property to your LLC which might come with taxes.

If you have a mortgage on the property, you’ll need to consult your lender to see whether there are any restrictions on the transfer of the property. In some circ*mstances a transfer might trigger a due on sale clause which means you’ll need to pay off the remainder on the loan or face foreclosure.

The steps required to officially create your LLC are nearly identical in most states — but some require an additional step or two. If you want more detailed information on how to start an LLC in your state, see our state-specific guides at the end of this article.

Step 1: Name Your Real Estate LLC

If you’re starting an LLC to hold property, you’ll want to choose a formal name (last name or initials of the member(s)) that is completely unique from any other name in existence in your state. You’ll also need to comply with your state’s guidelines for naming a business entity which generally include:

• Having the name “limited liability company” or one of its acronyms in your name (LLC or L.L.C.)
• Avoiding confusion with a government entity or department (e.g., NSA, IRS or Department of Treasury)
• Avoiding restricted words or phrases that imply an official capacity without permission from the state (e.g., University, Bank or Taxation)

Step 2: Choose a Registered Agent

All states require LLCs to have a registered agent on record. This agent is responsible for receiving important state and legal documents on behalf of the LLC. You can choose a member of the LLC to be your agent, or you can hire a registered agent service to do the job for you.

Either way, the agent must be at least 18 years of age. Additionally, the individual or service must reside within the state and be easily accessible in case the LLC needs to be served legal documents.

Step 3: File Your Organization Documents

To officially create your LLC, you’ll need to register your company with the state (usually the secretary of state’s office). To register, you’ll need to file a formation document called the articles of organization or certificate of formation (the name varies across states) and pay a filing fee.

This document houses all your LLC’s contact information as well as details about your LLC that will then be on record with the state. Some common information you’ll need to put in the document includes:

• Name of your LLC
• Address of your LLC
• Purpose of your LLC
• Name and address of your Registered agent
• Date of formation
• Name and address of the individual that’s filing

Step 4: Create an LLC Operating Agreement

While an operating agreement is only required for LLCs in a few states, it’s a best practice to have one in place — especially for a real estate LLC. This agreement is a contract between the members as they relate to one another, and as they relate to the LLC.

This agreement can be as detailed or as broad as the members prefer. Some common clauses in an operating agreement include:

• Voting rights
• Transfer of ownership procedure
• Profit and loss distribution
• Accounting and other financial information
• Day-to-day operations
• Member rights and responsibilities

If one is not required in your state and you choose not to have one in place, your LLC will be governed by the state’s default LLC laws which might not be preferential for your company.

Step 5: Get an Employer Identification Number

An employer identification number (EIN) is essentially a Social Security number for your business. It will be the number you use when filing taxes or applying for loans or opening a bank account. LLCs with more than one member or employees are required to get an EIN. However, even single-member real estate LLCs should consider getting one.

An EIN is provided by the IRS and can be obtained by a free application online. Alternatively, you can pay for an LLC formation service to acquire one on your behalf.