A Limited Liability Company (LLC) is a business structure that combines some the features of a partnership and a corporation. Over the last decade, LLCs have become the preferred way for groups of real estate investors to structure their businesses.
Why have LLCs become so popular today? Here are three reasons . . .
- They offer some of the protection of corporations – LLCs are legal entities that are separate from their owners. They therefore offer some protection from legal liabilities and other losses. If someone gets injured in one of your properties and sues, for example, it will be difficult for that person to lay claim to your personal properties or assets. (Consult your attorney for advice.)
- They can be quite flexible – LLCs can be structured so that different investors own different percentages of a company’s holdings. You can own 75% of your LLC, for example, while another individual can own 25%.
- There are tax benefits too –LLCs can be set up so that profits are shared among investors, who report them on their individual returns. Yet there are other tax options too. For example, you can take limited profits from the LLC for tax purposes, while rolling some of the profits back into the company to improve or buy additional properties. (Again, consult your attorney and/or accountant for complete information.)
There are some downsides that you should be aware of too. The first is that you need to retain and pay an attorney to set up an LLC. The second is that your state will charge fees to establish your LLC.
In general, the owners of an LLC report income on their individual tax returns. LLCs must also file specialized tax forms and reports – and sometimes pay taxes – in the states where they do business. Again, consult with your attorney and accountants for more information.
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