Attorney John Mlnarik
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Pros and Cons of Forming an LLC for Real Estate Investments
Forming a limited liability company (LLC) for real estate investments has been a common practice in Florida for more than 30 years because an LLC can help investors protect their personal assets from any liabilities associated with their real estate investments.
Although some real estate investors may elect to rely solely on liability insurance to protect themselves from a potential lawsuit, there are some risks to this approach. Liability policies generally have exceptions and limits that do not wholly protect investors from litigation; an LLC’s protective power is typically broader and more beneficial.
Here are the advantages of forming an LLC for real estate investments:
Limits personal asset exposure to legal judgments relating to the LLC’s investment properties.
Offers pass-through taxation benefits. Although “S” corporations also offer this benefit, they are subject to other requirements and restrictions that may limit their usefulness to real estate investors.
Foreign ownership and investment in U.S. real estate is allowed through an LLC.
Transferring ownership in real estate holdings can easily be accomplished via gifting of membership interests. This can be done without having to execute and record a new deed, thus allowing property owners to avoid transfer and recording taxes and fees.
LLCs can be managed by an owner or third party manager, while corporations are required to have officers and directors.
Offers flexibility in profit distribution options. LLC owners can determine their own distribution structure, whereas “S” corporations require pro rata cash flow distributions.
Although there are many advantages, not every real estate investor will want to take on the responsibility of managing a company and may instead elect to protect personal assets by purchasing liability insurance.
In order to maintain personal liability protection, LLCs do require that owners observe the legally required corporate formalities such as maintaining separate bank accounts, maintaining a registered agent and maintaining sufficient company records to keep the LLC in good standing.
Real estate investors considering forming an LLC for their investments should do so prior to purchasing investment property since it is easier to purchase property through the LLC than to transfer it later when you may need your lender to consent to the transaction.
A single-member FL LLC may not offer the same level of liability protection as a corporation.