How To Create an LLC: A Step-by-Step Guide (With Video!)

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Creating a limited liability company (LLC) is crucial to becoming a successful real estate investor. An LLC is a great option for small business owners. 

Running a real estate business under an LLC gives you personal liability protection, certain tax benefits, business credibility, and privacy. Also, LLC owners have fewer expenses than those running a corporation.

Many new business owners assume that it is complicated to start an LLC. While there is a lot of paperwork to form an LLC, it’s not as challenging as you would think. Ultimately, a limited liability company has more benefits to real estate investors than drawbacks.

This article is a step-by-step guide on how to start an LLC. You will learn what is involved in LLC formation and how to maintain your business entity to run a successful property investing business.

What Is an LLC?

An LLC (limited liability company) is a business structure used to own, operate, and protect a business. The business entity has liability protection like a corporation and the tax benefits of a sole proprietorship or partnership. Therefore, LLC laws mean that your personal assets are protected in case of bankruptcy or business debts.

Forming an LLC to run a real estate investment business gives you plenty of flexibility. For example, you can be the sole proprietor of the company, or you can own it with your spouse, partner, or investors. If the LLC faces a lawsuit or incurs debts, your personal assets and other owners’ assets are generally protected.

Most property investors create an LLC for federal tax purposes. The LLC structure benefits from pass-through taxation. Therefore, LLC owners report profits and losses on their personal tax returns rather than the business paying taxes. This allows you to take advantage of certain deductions and tax credits.

12 Steps to Create an LLC

To start an LLC, you must decide on a business name, file your formation documents with the relevant state agency, pay filing fees, and get an Employer Identification Number (EIN) from the IRS. After the LLC paperwork is approved, you can open a bank account and start running your business as a registered legal entity.

State laws determine the specific procedure involved in registering limited liability companies. However, there are generally 12 steps required to start an LLC. Let’s look at them in more detail.

1. Find a reliable certified public accountant and attorney

Getting expert advice from a real estate attorney and CPA is advisable before you start an LLC. They can help you decide on the type of LLC to create and give you professional legal and tax advice. 

For example, a single-member LLC is best if your business will be a sole proprietorship. However, a multi-member LLC is necessary if there will be more than one member.

Sometimes a real estate attorney could suggest registering as a S corporation. However, an LLC is usually suitable for most real estate investors.

Of course, you can omit this first step if you already work with a certified public accountant and real estate attorney.

2. Choose a business name and register it

Choosing a business name is the first step to form an LLC. The business name must meet certain criteria. First, it must be unique and not already registered or similar to a name already used. Also, it cannot include confusing terms like “Inc.,” “Corp.,” or “Nonprofit,” as these represent different business structures.

Your business name should have the potential to attract potential clients. However, consider the future. The business name should not be so narrow that it limits your future business opportunities as you diversify your investment portfolio.

In most states, you search for an LLC business name on the Secretary of State business entity database. The rejection of an LLC formation is typically based on the LLC name.

3. Designate a registered agent

Before you start an LLC, you need your own registered agent. The job of a registered agent service is to receive legal documents and official correspondence on behalf of your LLC. The LLC’s registered agent promptly forwards all correspondence to you.

State laws determine who can serve as a registered agent. Here are some general guidelines:

• The person must be a state resident over the age of 18.
• The registered office must be a physical address in the state.
• The company acting on your behalf must provide registered agent services in the state.
• You can be your own registered agent if you live in the state
• If you want to operate your business in another state, you must find a company providing registered agent services in that state.

One of the benefits of creating an LLC is privacy. Therefore, some real estate investors who work from home hire a registered agent to avoid having their physical address listed in public records.

4. Obtain a copy of your state’s LLC Articles of Organization Form

When you form an LLC, you file a legal registration document with the state agency that handles business filings. In most states, this is called the Articles of Organization. However, in other states, it is called a Certificate of Formation. You can obtain the LLC form from the website where you searched for the LLC name.

At the same time, you can determine if your state laws require you to file an Operating Agreement. Some states require professionals in the real estate industry to register as a Professional LLC. Therefore, you should find out if you must form a PLLC.

If you want to expand your real estate investment business to another state, you need to register in that state as a Foreign LLC.

5. Prepare the LLC Operating Agreement

Most state laws don’t require filing an Operating Agreement with the Secretary of State. However, preparing one makes good business sense for several reasons. The document can be important if you hope to attract investors in the future.

The LLC Operating Agreement is crucial if you have more than one member in the LLC. It states the business structure, who makes decisions, and what happens if a member leaves the company. The agreement should anticipate specific scenarios and outline strategies to protect the business.

The agreement gives your business structure even if you start an LLC as a single member. It outlines how you will operate, pay yourself, and separate your business from personal finances. The document also outlines your exit strategy—for example, what would happen to business assets if you die or cannot run the business.

6. File Articles of Organization

Filing your Articles of Organization is the most important step when you form an LLC. This document is the blueprint of your business. If required by the Secretary of State’s office, you should file the Operating Agreement at the same time.

The information required for the Articles of Organization includes the following:

• LLC name
• Address of the primary place of business
• Names of the LLC owners (called members)
• Duration and purpose of the LLC
• LLC’s registered agent and address
• Signature from one or more of the LLC owners

Filing fees to form an LLC differ from state to state. However, the LLC cost can vary between $50 and $200. Depending on where you live, the state’s office processes the LLC Articles of Organization instantly or within a few business days. In states where processing an LLC takes a few weeks, you can pay an extra filing fee for a faster service.

7. Get an Employer Identification Number (EIN)

After successfully creating an LLC, you can apply to the Internal Revenue Service (IRS) for your EIN. This step registers your business entity for federal tax purposes. Think of it as a Social Security number for a legal entity. You can apply for an EIN online at the IRS website.

Small business owners with employees or more than one member of the LLC must have an EIN. However, an EIN can benefit you if you are a single-member LLC. For example, you may need the nine-digit EIN to open a business account at your bank. Also, you keep your Social Security number separate from your business filings.

8. Open a business bank account

It makes sense to open a business bank account when you form an LLC. A separate entity for your business income and expenses is important for several reasons. The business account helps protect your personal assets and business assets. You also increase your personal limited liability protection.

Here are a few more reasons why a dedicated business bank account makes sense:

• Simplify recordkeeping, tax filing, and financial planning.
• Keep an accurate record of business expenses and income.
• Access to specialized business services banks offer.
• Maintain clear records of real estate transactions and business-related financial activities.
• Get access to loans for real estate investing.

A business account is crucial to give your LLC legal protection, limit liability, and give professional credibility. It helps you manage your investments more effectively, maintain accurate records, and ensure compliance with tax and legal requirements.

9. Obtain business licenses and permits for real estate investing

You may need a business license or permit, depending on your real estate investing business and local laws. Some states require all registered businesses to have a general operating license. 

You may also need a sales tax permit or a professional license. The state agency that handles business filings can inform you which business licenses are necessary.

Some real estate investors get a business license to represent a property seller or buyer in a real estate deal. This gives them access to the Multiple Listing Service (MLS) and profitable investment opportunities. And because you can buy and sell real estate without an agent, you potentially save money on agent commission fees—6% to 8% on every real estate transaction.

10. Decide if you need a DBA

A “Doing Business As” document lets you operate under a name different from the LLC name. When creating a limited liability company, business owners are limited in the name choice of the registered name. Therefore, filing a “fictitious name” through a DBA gives you more freedom. You could also file several DBAs if you want to separate business entities.

The good news is that the filing fee and amount of paperwork for a DBA are less than creating a new LLC.

11. Get tax advice and file any required forms

Getting advice from an accountant specializing in real estate can save you thousands of dollars per year. A certified public account can advise on deductible business expenses, tax classifications, and filing the proper tax forms.

Typically, LLCs have pass-through taxation. However, the IRS doesn’t have a specific tax classification for owners of LLCs. For example, the default tax status for a single-member LLC is a sole proprietorship. However, multi-member LLCs have the same tax status as partnerships.

Here are ways your tax status can affect your business:

• Sole proprietorship or partnership: You file tax forms as a self-employed person. This means you report business income and expenses on your personal tax return. Therefore, you pay self-employment tax on your share of business profits. Similarly, partnerships file a partnership return.
• S corporation: You can elect to be taxed as an S corp. Like LLC taxes, an S corp uses a pass-through taxation system. Therefore, you record profits and losses on personal tax returns. However, owners can also be employees, meaning they only pay taxes on their salary, not business profit.

In addition to income tax, you may be liable for franchise taxes. In this case, a tax advisor or CPA can advise you on how and when to pay the franchise tax.

12. Keep your LLC active

Maintaining your LLC is important for several reasons. First, keeping your LLC active ensures your business remains legally recognized and protected. Also, an active LLC must fulfill various legal and regulatory obligations, such as filing annual reports and paying taxes, to keep your business operating smoothly.

How to Maintain Your LLC

It’s crucial to keep your LLC active to enjoy its benefits. Just because you have an Employer Identification Number and Certificate of Organization doesn’t mean your limited liability company remains active. There are a few necessary tasks to keep your LLC in good standing.

How can you maintain your real estate business LLC to enjoy its benefits? Here are some long-term strategies to keep an active LLC status:

• File the annual report: Most states require LLCs to file an annual report. The annual report—Statement of Information (SOI)—typically includes basic information about the LLC’s ownership and address. Ensure you file these annual reports with the Secretary of State before the deadline.
• Pay state fees and taxes: Promptly pay all state fees, including annual franchise taxes. Failure to pay state-imposed taxes or fees may result in an inactive status, and you may lose your liability protection.
• Maintain detailed records: Maintain accurate, up-to-date records with the state. Inform the state of any ownership, management, or contact information changes. In the event of a lawsuit, you must show your LLC is a separate entity from your personal dealings. You’ll want to keep the following documents handy: articles of organization, operating agreements, EIN confirmation letter, meeting minutes required by the operating agreement, copies of business licenses and permits, and all financial statements and tax records
• Maintain a registered agent: Continue to have a registered agent with a physical address within the state. They receive legal documents on behalf of the LLC.
• Keep up to date: Be aware of and comply with any other state-specific requirements, such as publication notices or industry-specific licenses or permits. Also, stay informed about regulation changes that may affect LLCs in your state.
• Renew business licenses: If your business requires a license or permit, renew them as needed and on time.
• File federal taxes: Report income and pay federal taxes as required by the IRS. Use the LLC’s Employer Identification Number (EIN) for tax purposes. Consulting with a tax professional can help ensure full compliance with your tax obligations.
• Keep personal finances separate: Have a strict code of practice for keeping personal and business finances separate.
• Respond to state communications: Be attentive to any communication from state authorities, and respond promptly to inquiries or requests for information.

Failure to maintain an active LLC status and comply with state requirements can result in penalties, fines, or even administrative dissolution of the LLC.

Why Real Estate Investors Should Create an LLC

The primary reason to create an LLC is liability limitation and asset protection. The business entity protects your personal wealth and assets from debts or lawsuits related to your real estate investments. An LLC also gives your business credibility and enhances professionalism.

Here are some additional reasons why an LLC is beneficial for real estate investing:

• Fewer formalities: Regarding LLC paperwork, less work is involved with running your business than operating as a corporation. Also, there is less administration for small business owners.
• Flexible ownership: The LLC structure offers more flexibility than corporations regarding ownership. You can be a sole proprietor or have multiple members. Also, unlike a general partnership, you are not legally liable for the actions of other members.
• Financial protection: The greatest benefit is unlimited personal liability for business debts. Therefore, you don’t risk losing personal wealth or private assets if the company goes bankrupt.
• Privacy: You enjoy greater protection because your personal details and physical street address don’t appear in public records. You can also use a company that provides registered agent services to care for all legal documentation.
• Better loan terms: Banks and credit unions typically offer real estate investors better loan terms when borrowing as an LLC. Even if you are a single-member LLC, you will likely get better offers than applying as a private individual.
• Filing in a different state: You can file for an LLC in a different state if there are more favorable laws. Of course, this entails extra paperwork, filing fees, and time. However, the benefits could add up and make it worth it.

Related: The Pros and Cons of Buying a House with an LLC

Creating an LLC—Key to Successful Real Estate Investing

Forming an LLC for your property business is key to your success as a real estate investor. It’s the best way to protect your assets and wealth and enjoy many tax benefits.

Before creating an LLC, research various options to determine the best business structure for your company. After creating your LLC, you must retain its status as a viable business. With a real estate LLC, you can maximize the potential of your property investment business.

FAQs About Creating an LLC

Navigating the world of LLCs can be challenging for real estate investor startups. Here are some common questions rookies ask when considering creating an LLC.

Do I need an attorney to form an LLC for real estate investments?

You don’t need a real estate attorney to create an LLC; however, hiring one is advisable. Although starting a limited liability company is easy, an attorney specializing in real estate can ensure compliance with local laws. In the long run, an attorney can save you money and time and keep you out of trouble with the IRS.

What are the tax benefits of using an LLC for real estate investments?

LLCs often enjoy pass-through taxation, where profits and losses flow through the owner’s annual tax returns. A tax specialist can advise on which business-related expenses can help reduce your tax liability. Also, unlike C corporations, you avoid double taxation.

What are the common types of LLCs?

Single-member or multiple-member LLCs are the most common business structures real estate investors use. However, depending on your circumstances, you could benefit from one of the following LLCs:

• Professional LLC, if your state requires this for real estate investing.
• Member-managed LLC is when the company’s owners manage the business.
• Manager-managed LLC is when only certain owners have management responsibilities.

How much capital do I need to start an LLC?

There is no capital requirement to form an LLC. However, LLC formation requires paying filing fees, annual taxes, franchise tax, and other startup costs. Depending on your state, an LLC can cost around $1,000 to create if you use a registered agent or third-party services.

You also have LLC maintenance costs like filing annual reports, a business license, state taxes, and compliance services.

Is forming an LLC worth it?

Generally, creating an LLC to get started in real estate investing is a wise move. LLCs are relatively inexpensive to set up and maintain compared to forming other business entities. You also get several benefits, like protecting your individual assets, tax breaks, and business services from banks. These benefits can help make your investment business successful.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.