One of the most important steps in real estate investing for beginners is to be sure you understand the best approach to forming your business. If you haven’t heard the term Series LLC or researched the best ways to form real estate businesses in your state, then you’re at a great starting point here.
Every state has their own rules for Limited Liability Companies (LLCs), which are one of the most popular standard business entities formed by real estate investors to manage and protect their properties. LLCs make it simple to file as a sole proprietor, and they use pass-through taxation to take advantage of deductions that apply to your mortgages and other expenses of owning and managing real estate.
Even if you don’t have a Series LLC option in your state, it’s still useful to understand this concept. Not every guide to real estate investing for beginners includes information about Series LLCs for real estate, but they should! Over the past several years, more states have created Series LLC options for business owners. And California, which does not allow Series LLCs to be created in their state, does have an exemption for ones that are formed in other states. The Series LLC is a valuable concept to familiarize yourself with because it can be a useful tool to help grow your business as a real estate investor.
What Is a Series LLC?
You might be wondering what a Series LLC is and how it can benefit your real estate investments. The concept of a Series LLC is relatively new to the business entity world, and not every state offers them as an organizational option for owners. Series LLCs originated in Delaware in 1996, where they were created by some of the most well-known lawyers who worked in the state.
Essentially, these unique entities allow business owners to manage several LLCs as separate pieces of the same legal business entity. Each one is referred to as a “Series” with its own managers, operating rules, banks accounts, and properties. Separating your properties under a Series LLC can make it much easier to keep track of your investments, while creating protective legal barriers between each one. In fact, the concept of Series LLC’s was created with real estate investors in mind.
Benefits of Series LLCs
We mentioned the biggest benefit mentioned above: These entities help protect your investments from legal liability. As you know, lawsuits can break any business — even large companies flush with capital. Lawsuits can be especially detrimental to individual investors and those who are just starting out. This is why you should always maintain separation between all of your business investments and personal assets. Bank accounts, credit cards, personal and business expenses should all be separate. Make sure you speak with a CPA who is knowledgeable in real estate investing to understand how to align your day-to-day operations with the laws and regulations that apply to your business.
Even though Series LLCs are not always cheaper than forming multiple completely separate LLCs, there are instances of savings that can be found. For instance, in Delaware, Series LLCs only have to pay their annual franchise tax once, since they are not technically considered multiple LLCs. However, if you set up a completely separate LLC for each of your real estate properties, you could be stuck with a $300 fee for each one.
Are There Drawbacks to Series LLCs?
Some experts are a little wary of Series LLCs simply because they are a relatively new type of business structure that is currently not offered in very many states. They may also point out that depending on the extent of your business, Series LLCs aren’t always cheaper to set up, since some states where they are allowed apply the same fees to each series that they would to separate LLCs. This is another reason why it’s important to speak with legal and/or tax professionals who understand the LLC formation laws in your state (or the state where you wish to invest in real estate property).
Some legal experts point out that there hasn’t been much litigation in court to test the protections that business owners can expect from Series LLCs. This could make you hesitant to do business in multiple states with this type of structure. However, there is always a risk that any court may completely ignore precedents or laws in other jurisdictions. While some of these points are certainly worth considering, Series LLCs have continued to be used by investors, entrepreneurs, and other business owners who want to hold separate business interests within the same umbrella entity.
Is a Series LLC is Right for Your Real Estate Business?
To be sure you can use a Series LLC for your holdings, check with your state regulatory authorities or contact Incfile to learn more about our state-specific LLC formation services. Even if a Series LLC is not offered in the state where you want to set up shop, we can help you determine the best way to protect your real estate and personal assets. If you set up the right type of business, listen to good advice, follow the rules and maintain good standing, running your real estate investment business doesn’t have to be overly complicated!
Are you a new real estate investor who’s ready to start a business and form a real estate LLC? Or are you an established real estate investor who wants to reorganize your business structure with a Series LLC to maximize your business potential? Talk to Incfile today! Our incorporation experts can help you evaluate your options with state-specific advice about real estate LLCs.