Written by: Eric Davis
Creating and maintaining a new business is exciting, so much so that people equate it to having children. One important obligation of a business owner is to ensure that nothing can hinder future success in terms of legality. This step starts with the establishment of your new company. Choosing the correct classification for your business is one piece of this cycle. Both new and experienced property owners come to a point where they decide whether or not they should start an LLC (Limited Liability Company) to deal with investment property properly.
LLC, a well-known type of business in the real estate industry.
An LLC, or otherwise called a Limited Liability Company, is a kind of business structure that you can establish as an individual or with others as an organization. LLC owners are referred to as members, and they can have either a single-member or multi-member. This implies that it’s a partnership and not a corporation. All incomes are “passed through” to the members to declare their taxes. An “operating agreement” should be set up once LLC is created. The agreement summarizes the privileges and obligations of each member of the LLC. The contract can assist you in dealing with the property smoothly and securing each member in case of legal problems. Laws and guidelines vary by state. If you are in Washington state, creating an LLC is a beneficial choice due to the individual insurance and tax benefits. A “transfer of title” is commonly known if you want to create an LLC. It’s a process where you transfer the property’s deed to the LLC.
Advantages of an LLC
1. Limiting Personal Liability – If you have property as an individual and somebody files a case towards you, your assets are at stake. However, if the property is under an LLC, the other assets, such as a personal bank account, are shielded from any lawsuit.
2. Pass-Through Taxation – This implies that the business doesn’t need to document or file a different tax return. Since LLC is considered a sole proprietorship or partnership, corporate charges and guidelines do not apply.
Different benefits an LLC offers.
3. Flexible Management – There are no limitations on the number of members an LLC can have. You can either have the members or assign managers in the daily decision-making for the business. LLCs provide tremendous ownership, administration, and taxation flexibility.
4. Simplicity – LLCs are less difficult than S partnerships or C enterprises. There is no governing body directing business choices, which can entangle or slow down any critical changes you need to make in your business. You control the number of members and your business’s administration network.
5. Professional Appearance – Setting up an LLC can increase your business’s credibility. Owning and having real estate under an LLC appeals to the public more professionally, particularly when promoting it to future tenants in a commercial or residential manner.
6. Partnership Opportunities – LLCs can have foreign members or investors. They have no limitations on how many or what type of owners it can have. LLC gives more opportunities for future partnerships and investments than the other types of business structure.
Disadvantages of LLC
1. Fees – Forming and operating an LLC cost more than being a sole owner or having a partnership. Keep in mind any recurring costs such as annual registration or annual franchise tax fee, depending on the state. It would be best to prepare a financial plan for different expenses and charges.
2. Transferring Ownership – Transferring ownership is more complex in an LLC than in a corporation. In a corporation, ownership can grow via stock sales, while LLCs need approvals of all members before adding new ones or changing the distribution of ownership. There are several ways where you can transfer your property’s title. Each deed differs in terms of warranties. The most common are warranty deeds and quitclaim deeds. Make sure to research these before deciding. Make sure also to check the bank’s policy on transferring ownership of the property to an LLC.
3. Tax Benefits – LLCs do not exempt owners from taxes. LLCs are strictly used for limiting liability; there are no tax advantages.
In Washington, all LLCs are needed to get a state permit to operate. When an application to form an LLC is filed, each business is provided a unique number to use that is being utilized by different state agencies for filing, taxes, and identification. The Washington Department of Licensing’s website provides more details about this. LLCs are the most famous structure for real estate businesses in Washington, and for the company to succeed, all processes required should be understood and learned.
Online videos that show the steps in registering your business.
Some things to consider in forming an LLC:
- Take time to think about who part of the LLC will be.
- Naming the LLC can be challenging. The name should not be similar to an existing entity. Also, the LLC name doesn’t have to be exactly your business’s “trade” name. You can go to the Washington Secretary of State Corporations Division to check name availability.
- Set up a different banking account to separate business and private expenses. It will help simplify the taxes and accounting and build your company’s credit record. The state of Washington does not demand a separate operating agreement, but it can benefit.
- The process of creating an LLC, filing for your documents, and paying any necessary charges varies by state. To avoid confusion in legal or financial issues, make sure to study what is needed in legally creating and running an LLC in your state.
Putting your property under an LLC has potential advantages and drawbacks. It’s a lot to handle, especially for new businesses that haven’t completed the procedure before. But most real estate investors believe that the pros are worth the trouble while the cons are manageable. However, Davis Property Management has flexible work styles in order to meet any diverse scenario. We seek to innovate and improve the tenant experience while at the same time ensuring a profitable long-term solution for our owners. If you need assistance, you can reach us by phone at 425-658-7471 or send us an email at [email protected].
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