Real Estate Investing Basics

A Step-by-Step Guide to Set Up Your LLC (With Video!)

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setting-up-llc

A popular topic I hear a lot about is LLCs. It’s talked about all over BiggerPockets and my YouTube channel. People pose questions like, “Should I set up an LLC? What Should I name my LLC? In what state should I set up my LLC?” …Just to list a few.

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People think of the LLC as overly complex. But in reality, it’s not. I’m going to boil it down for you in a step-by-step process —as well as a crash course on what an LLC is.

Disclaimer alert! I’m not an attorney and I’m not a CPA (nor is BiggerPockets). I’m just a real estate investor dude, and the advice I’m giving you is my personal opinion on LLCs based on my own experience.

Before we dive into the steps, let me break down what an LLC is.

What Is an LLC?

An LLC is a limited liability company. I’m not sure why they call it that, but it is the most commonly used vehicle for owning real estate. There are also other types of corporations you can use: a C corporation, a partnership, an LP, or an S corporation, and the list goes on.

An LLC is when you are the sole proprietor of the company. You could also own it with investors, your spouse, a partner, etc. Say you own real estate that makes money for you, the LLC passes the money from that business venture to you. If that venture were to lose money—like a single-family home—you can claim a loss on depreciation of the home.

LLCs allow the money to pass from the business to you, but shield you from liability. (I highly recommend you watch my video, to see me use my artistic skills explain this.) If you have a tenant who is unhappy with something that happened at your property, the LLC makes it more difficult for them to get a hold of you—aka sue you. The LLC is an asset protection vehicle that makes it so your personal finances aren’t at risk.

An LLC also allows you to tack on expenses to your business, such as your cellphone bill or your car payment. If you can prove that you’re using these things for your business, you can make them business expenses. And then you can claim them as deductions on your taxes. Just be sure that you can prove expenses are business-related.

One last thing is that if a mortgage is through your LLC, it wouldn’t show up on your personal credit report. LLCs can shield you from debt that you’re taking on. I own a bunch of properties, but they don’t show up on my credit report because of my LLC.

Now, let’s get into how to create an LLC.

Setting up an LLC

1. Talk to a CPA & Find a Lawyer

No a CPA and lawyer aren’t operating for free. They may charge you this thing called money. This video (and blog post) are free, and I’m happy to do that for you. But a CPA and lawyer will want to get paid. Though it’ll cost you, you’ll want these two professionals in your corner—along with their expert advice. They’ll understand how to meet your financial needs, explain what your tax liabilities are, and what legal ramifications to look out for when setting up an LLC.

If you are wanting to set up an S corp, which is if your business is fee-based, you’d definitely want to speak with a CPA and lawyer for tax-based strategies. This type of business would be for fix-and-flippers or if you’re charging fees to clients. But that’s another conversation for another time. (Comment if you’d like me to post a video on BiggerPockets about S corps!)

Related: 4 Tips for Hiring the Right CPA for Your Real Estate Business

2. Pick a Name

This sounds silly, but it has to be done. You need to decide what the purpose of your LLC will be. If you own one property and that’s all you ever plan to do, you can name the company the address of that home. Or name it something benign.

But if you want to grow your company, be more mindful of the name. Make it catchy and easy to remember, but also have it reflect what your company does. Trust me, there’s more to a name than you think.

3. Choose a State

I will typically register my LLC where my properties are. Some people pick certain states for tax purposes or to prevent tenants from coming after them. But to keep it simple, I set up my LLC where the property is located. You can also set it up in the state where you’re a resident.

Next, you want to go to the state’s website to register your LLC. Make sure the name you want is available and then you fill out the necessary paperwork to get your LLC up and running. This will likely cost you some money, roughly $200-$300.

FYI, the following step runs concurrently to this one. So if you do Step #4 before 3, that’s fine.

meeting-with-lawyer

4. Set up an EIN Number

Go to IRS.gov—and good news, this is free! When you’re registering your business with a state, it will ask for your EIN number but I do Step #3 first to make sure the name I want isn’t taken. And then I keep the state tab open on the page asking for the EIN number.

To get the number, you’ll have to fill out a questionnaire on the IRS website, but it will only take about 10 minutes. Once you’re done with that, you’ll be given an EIN number that you can then fill out on the state page.

5. Find a Registered Agent

This means that there is a primary contact who lives in the state where you want to do business. If you're investing in your home state, then you are the registered agent. But if you're not investing in the state where you live, you'll need to find a registered agent.

There are registered agent services (that will cost you about $100-$200 per year) that can represent you if you're doing business out of state. They practically provide you an address and warm body that can speak on your behalf.

I recommend talking with your lawyer when seeking out a registered agent out of state.

Related: What You Should Know About Registered Agents for Your Out-of-State LLC

6. Create an Operating Agreement

This defines the managing member, which could be you, a group of people, two partners—really any which way. The important thing is that the managing member is the one calling the shots. They are basically the president of the company.

This agreement goes over the goals of the company, employee roles (if it’s not just you), and so on. Oddly enough, this agreement doesn’t get filed with the state. It is simply a legal document that you need to formalize the terms of the LLC.

And now that we’ve gone over how to set up an LLC, let’s get into how to maintain one.

Maintaining an LLC

Businessman talking on mobile phone and making notes. Man sitting at his office desk working on graphs and charts and discussing on phone.

1. Keep up with Annual Expenses

If there is a change in the registered agent, this will have to be notified to the state. You'll have to send in your registration certificate. Or you may have to send in your annual report that states who the agent is, who's still at the company, where the company is located, and a fee—of course.

Remember, if you're not the registered agent you'll be paying an annual fee to the registered agent service.

2. Pay Taxes

You’ll have to pay federal taxes as well as taxes to the state that you’re registered in. If your business is located in one state and the investment property is in another, you may have to pay taxes for both those states. This is why I register my properties where my business is. Then I don’t want have to pay state income taxes twice.

You may know some tax loopholes that I don’t. But this is also why you should hire a CPA because they will be able to guide you through this. They will, more than likely, no some loopholes in the tax code.

That’s all I got for now. Remember, this was my personal opinion on LLCs, and please talk to a lawyer and CPA before you set one up. Bottom line, LLCs are great when you own property and not as complex as people make them out to be.

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Do you have any questions, or is there any steps I left out?

Share with a comment below!

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, is a developer and owner of commercial and residential property with a mission to “transform lives through real estate." Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to owning and managing over 370 units of residential and commercial assets throughout the east coast. DeRosa has completed over $30 million in real estate transactions involving private capital including fix and flips, single family home rentals, mixed use buildings, apartment buildings, office buildings, and tax lien investments. Matt Faircloth is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’s Facebook Live sessions and educational webinars.

    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied 5 days ago
    Hi Matt, Just want to add one thing. For all California investors that have properties outside of CA and those properties are "owned" by an LLC formed in the state that the properties are located in, listen up. Even though you have the property in another state, owned by a LLC which was formed in another state, you will still have to form a California LLC if you are a CA resident. You do not want the FTB (Franchise Tax Board) after you. Their bite is worse than the IRS! Talk to a CPA that understands in-state and out of state LLC's. In most cases, you would form a CA LLC and then register that CA LLC in each state as a Foreign Entity / Foreign LLC. The EIN would be the same but you will get a different State Tax ID per state. As far as I know, it is just California that does this. Oh, an LLC in the Golden State is $800 + $20 fee paid annually!
    Stephanie Birmingham
    Replied 4 days ago
    This is super helpful info! Question: Is it wise to set up your LLC before you begin everything so that you can have your tax write off's for whatever property you are going to purchase, then once you purchase and the deal is final you register that CA LLC in the state you bought in (if out of state)?
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied 4 days ago
    @Stephanie: I would ask your CPA or legal council regarding the timing.
    Christopher Smith Investor from brentwood, california
    Replied 4 days ago
    Never has so much (time effort and money) been expended, by so many for so little.
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied 4 days ago
    @Christopher: It really is not that much time and effort, but there is an expense. If you only have 1 or 2 units, it might not be worth it. If you are expanding and/or have many units, then it is worth it, IMHO. As with anything, there is no one method that works for all. How do you have your investment properties vested/titled?
    Jake Heiar
    Replied 4 days ago
    Thank you
    Kelsey Mills
    Replied 3 days ago
    In regards to "registered agents" - if your out of state properties are managed by a property manager, is that someone who could qualify as a "registered agent"? I'm sure it varies among property managers, but I guess the core question is - what kind of risk is involved for someone as a "registered agent"? Probably a better question for a lawyer, but would love any background or info folks have available.
    Christopher Pound from Greater Denver Area, CO
    Replied 3 days ago
    For anyone thinking of setting up an LLC, I would definitely recommend putting @scott smith on your list to call.