Most people form an LLC (i.e. Limited Liability Company) to hold and manage their real estate for two reasons. First, if the LLC is formed correctly and there is a claim or lawsuit relating to the real estate, then typically, only the assets owned by the LLC, and not the taxpayer's personal assets, are subject to the claim or lawsuit. Second, an LLC provides tax advantages over other entity choices. For example, the profit or loss from an LLC with only one owner can be included on the taxpayer's tax return, and the limited liability company may not have to file a separate tax return. By contrast, a corporation would have to file a separate tax return.
Forming an LLC is a relatively simple process. In most cases, the application can be filed online with the state. You will need to know the name of your business, the tax information for the members of the limited liability company (such as, names, addresses, and social security numbers), and the LLC's contact information. You will generally pay a filing fee, which varies from state to state.
You can Google limited liability company, and you will find many companies that will create the LLC for you (for a fee). You will need the same tax information, however. Alternatively, you can Google your state name and "Secretary of State" to find your state's online form. It is also best to create the limited liability company in your own state.
In order to gain the maximum protective benefits from an limited liability company, many taxpayers transfer the property to the LLC, so the LLC becomes the legal owner of the property. If the title is not transferred to the limited liability company, and there is a lawsuit against the property, the taxpayer may be personally liable.
A properly formed limited liability company will generally protect the owner's personal assets from lawsuit or claims against the limited liability company, but it will not protect one asset owned by the LLC from being used to satisfy a claim relating to another asset owned by that LLC. In other words, all assets owned by the limited liability company are potentially subject to any claim against the limited liability company.
For example, if a limited liability company owned several properties and someone is hurt at one of these properties, then the person could sue the limited liability company. Consequently, all of the properties owned by the LLC could be used to satisfy the judgment - not just the property where the person was hurt. Therefore, the limited liability company could potentially lose everything from a lawsuit relating to only one of its properties.
To avoid these risks, taxpayers can form separate LLCs for each property owned. There are many factors to consider when making this choice. Some of these factors are the number of properties owned, the locations of the properties, and the way the properties are financed. You must also consider, the costs and administrative burdens associated with forming and maintaining numerous LLCs. You should discuss these issues with your tax accountant or CPA.
For more information about the tax benefits of forming an limited liability company, visit Use LLC for Real Estate Investments
Tax accountant John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Federal Way & Everett area on various tax issues. His firm, Huddleston Tax Accountants, also provides tax preparation service, quickbooks consulting and general accounting and bookkeeping service. Profile information on John Huddleston and the CPAs employed by Huddleston Tax Accountants is available at CPA Tax Accountant Profile Seattle Bellevue tax accountant John Huddleston is a frequent publisher of tax saving ideas.
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