Investing in real estate is quite popular nowadays. While some individuals get into the industry looking to have rentals that they can generate income off, others simply find a home in need of a little tender love and care (TLC), perform some repairs and put it back on the market.
No matter your role in the industry, California requires you to form a real estate limited liability company (LLC). You must understand unique details about this business formation before setting it up.
Benefits that both LLCs and real estate-specific ones afford you
Individuals looking to form a company often default to an LLC as their go-to formation. They do so for two primary reasons:
- They like that it affords them the ability to report company profits and losses along with their personal income taxes (a concept referred to as pass-through tax filing)
- LLCs come with built-in personal liability protection that protects an owner from any legal exposure for a company’s handling of matters
Some business structures are also more heavily regulated than others. An LLC is not one of them.
What are the drawbacks associated with forming a real estate LLC?
While there are many desirable benefits associated with forming an LLC, there are some downsides to doing so, too, such as:
- There are options that creditors can pursue to get around the built-in liability protection that an LLC generally affords you if they’re intent on coming after you
- You incur additional costs in running an LLC compared to a sole proprietorship
As for a real estate LLC in particular, one drawback to selecting this formation for your business is that it dissolves upon your filing of bankruptcy or death. Therefore, you must strategize as to ways to best pass your assets to your heirs simultaneously to form this type of business entity.
Determining whether a real estate LLC is the best option for you
The pros and cons associated with forming a real estate LLC as described above only scratch the surface in terms of factors you need to be aware of and weigh when determining what structure is right for you and your business concept. Take time to learn more about the different options that exist before deciding which option is best for you.