Should you set up a new LLC every time you buy Forgo Moorhead real estate?
If you are launching your real estate investment career, the way you structure your business entity is going to have a lot of impact on the company’s functioning, tax liabilities and many other important things. You can set up your real estate company as a sole proprietorship, a corporation or an LLC.
Most real estate investors prefer to incorporate as a limited liability company (LLC) for obvious reasons. An LLC shields you from personal liability and enhances your business’s credibility. The most important thing to keep in mind when you launch your real estate business is not to run your business in your own name. It will make your personal assets liable in case a lawsuit is filed against you.
While incorporating your business as an LLC seems like an obvious choice, many new real estate investors have a common question: Should they set up an LLC every time they buy real estate? Well, there are advantages and disadvantages associated with both the options. Below a few important considerations for you to make:
Why to set up an LLC for every new deal
- If you have partnered with other real estate investors on a new deal, then setting up a new LLC will enable to define the percentage of ownership each of the partners have.
- If you are buying a property out of state, you may want to set up a new business entity depending on the tax regulations and investment laws.
- Setting up a separate LLC for risky investments will shield your safer investments from liability to some extent. This is probably the biggest advantage of setting up a new LLC every time you buy a property. In case your new deal gets entangled in legal issues, your other properties will stay protected no matter what happens.
Why not to set up an LLC every new deal
- Bookkeeping will get more expensive if you set up a new LLC every time you buy a property. You will not only have to pay various types of fees every time you incorporate a new business entity, but will also have to pay an accountant for filing tax returns and keeping records.
- Your business’s credit worthiness will suffer. Since you will run a lot of business entities, each one of them will be treated independently by lenders when you apply for a property loan.
In conclusion
Your strategy will depend on your individual circumstances and approach to your business. If you don’t want to set up a new LLC every time you buy a new property, the better alternative is to keep all your properties under one LLC and take out an insurance policy that insures each of the assets individually.
Consult with a CPA to determine which type of a business entity will suit your individual circumstances.