What’s the purpose of an LLC???

Miami, FL · Member since 2017 · 53 posts · 11 votes

I’m still learning the financing part of the real estate business but can anyone help me understand the llc aspect of real estate? What’s the person of having a llc when from my understanding you won’t be able to apply for a loan under the business name nor will you be able to apply for a loan understand your name and transfer it to the llc. Anyone?

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Josh Bauerle

Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes

@Martinis Jackson I'm a CPA and what you are saying is not accurate.

A sole proprietor is a pass through and clearly included in the new tax plan benefits.

Yes, an LLC can make a different tax election, which a rental company would never do. And either way, the LLC itself changes nothing with taxes. You can make a different tax election with or without an LLC. Which again, wouldn't happen in this case with rentals.

ALL LLC's are disregarded. The IRS does not regard LLC's as an entity. When you have an LLC with more than one member the IRS regards it as a partnership, not an LLC. And again, there are zero benefits under the new plan for LLC's as opposed to sole props. ALL entities, except C Corps, are pass through entities. This includes sole props, partnerships and S Corps. Regardless of which one you are, you will receive the 20 percent reduction of profits under the new plan.

I'm not trying to pick nits here, there's just a lot of bad info out there on LLC's when it comes to taxes. There is zero tax benefit to having one and the IRS doesn't recognize an LLC as a taxable entity, whether it is one member or one thousand members.

The one and only benefit to an LLC is the potential legal protection.

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Brian Adzadi
Allentown, PA · Member since 2016 · 515 posts · 404 votes
8y
@Davidson Francois
No offense Davidson, please check your typos before hitting post thread. Kind of hard what you are trying to say.
Anyway, Yes, you are right to an extent about LLCs. Its not that you WON'T be apply for a loan but its going to much more expensive.
Mortgage companies like certainty. Meaning they like to know who they can chase after if bills are not being paid. LLCs place a veil over who to go after (except for sole proprietorships). That is why they demand a higher down payment through LLCs. You have more skin in the game if you put a higher down payment, and much less likely to default in their eyes.
So if you want to buy real estate through an entity without paying exorbitant amounts of money, a Sole Proprietorship is you best chance, not guaranteed it would be significantly but not as high as a group LLC.
Hope this helps.
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Martinis Jackson
Hyattsville, MD · Member since 2013 · 42 posts · 17 votes
8y
@Davidson Francois There are a number of benefits to establishing an LLC in real estate:
1) It will protect your personal assets from attack when you are doing business. For example, if you enter into an agreement under your own name, you are personally liable for any legal issues that arise from that transaction.
2) There are tax advantages to operating as an LLC as opposed to a sole proprietorship, specifically under the new tax plan.
3) It makes it much easier for you to partner with other investors on a deal. Usually, the investor will want to create an LLC for each project with an operating agreement governing the partnership.
I hope this helps.
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Davidson Francois
OP
Miami, FL · Member since 2017 · 53 posts · 11 votes
8y
@Brian Adzadi that's what i get for login on to BP via cell phone auto correct does its own thing sometimes but, what about protection from lawsuits? and tax breaks?
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Brian Adzadi
Allentown, PA · Member since 2016 · 515 posts · 404 votes
8y
@Davidson Francois
That is where the previous reply by @Martinis Jackson comes into play.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
I use an LLC to file a separate tax return instead of mixing it up with my earned income. The LLC is also useful to hide the identity of the owner. Tax records are public and I would rather people not know any more than they need to. The LLC owner can be looked up, but it is a layer. An LLC can help protect assets if you are sued personally. It will not, however protect your personal assets if the LLC is sued. The attorney will likely name the LLC, the owner of the LLC, the property manager, and anyone else they think will pay money to the plaintiff.
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Davidson Francois
OP
Miami, FL · Member since 2017 · 53 posts · 11 votes
8y
@Martinis Jackson yes, I'm aware of the pros of having a LLC, the confusion comes when we speak about the cons. For example; if i get a loan under my own name and want to switch it over to my LLC the loan may be due. Should i speak with the lender about their transferring regulations?
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
@Davidson Francois I have not found that to be true. I had my loan officer at the closing of a multi-parcel deal and they were perfectly fine with me transferring ownership to my LLC at a later date because I am still personally liable for the debt. It's not like the ownership actually changes. Also, the "due on sale" clause is an option the bank has. They don't actually have to accelerate the loan.
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Martinis Jackson
Hyattsville, MD · Member since 2013 · 42 posts · 17 votes
8y
@Davidson Francois as @Anthony Dooley mentioned, due on sale clauses are standard in most mortgage agreements, but does not necessarily mean it will be exercised (though it is still a risk). Also, you may be required to pay taxes on the transfer.
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Davidson Francois
OP
Miami, FL · Member since 2017 · 53 posts · 11 votes
8y
@Anthony Dooley good news to my ears! Thank you again Anthony for the great information. Thank you all @Martinis Jackson @Brian Adzadi
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Raymond J. RodriguesBusiness Member
Lender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
8y
Hello Davidson, I would love to hear about your real estate goals and any questions that you may have as I have been in this playing field for years. I also live in Miami as well, we should meet up sometime!
[email protected]619-456-8311
Helm Mortgage Corp.5127 Reviews
Website View Page
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Raymond J. RodriguesBusiness Member
Lender · Miami, FL · Member since 2017 · 1k+ posts · 797 votes
8y
@Davidson Francois
[email protected]619-456-8311
Helm Mortgage Corp.5127 Reviews
Website View Page
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Tom GimerBusiness Member
DMV · Member since 2017 · 3k+ posts · 3k+ votes
8y
LLCs are what people form rather than actually buying real estate.
Gimer Law516 Reviews
Website View Page
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
Originally posted by @Martinis Jackson:

@Davidson Francois There are a number of benefits to establishing an LLC in real estate:
1) It will protect your personal assets from attack when you are doing business. For example, if you enter into an agreement under your own name, you are personally liable for any legal issues that arise from that transaction.
2) There are tax advantages to operating as an LLC as opposed to a sole proprietorship, specifically under the new tax plan.
3) It makes it much easier for you to partner with other investors on a deal. Usually, the investor will want to create an LLC for each project with an operating agreement governing the partnership.
I hope this helps.
An LLC does not actually provide any tax advantages whatsoever. Under either the new or the old tax plan.
An LLC isn't even a recognized entity by the IRS. It's what they call a disregarded entity.
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
Originally posted by @Anthony Dooley:

I use an LLC to file a separate tax return instead of mixing it up with my earned income. The LLC is also useful to hide the identity of the owner. Tax records are public and I would rather people not know any more than they need to. The LLC owner can be looked up, but it is a layer. An LLC can help protect assets if you are sued personally. It will not, however protect your personal assets if the LLC is sued. The attorney will likely name the LLC, the owner of the LLC, the property manager, and anyone else they think will pay money to the plaintiff.
An LLC does not create a separate tax return. An single member LLC is still filed as a part of your personal tax return and profits from an LLC are still mixed in with your earned income.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
@Josh Bauerle My LLC is not a single member, it is a partnership with a separate EIN, so I file taxes on that separately from other income that is earned.
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
@Anthony Dooley Right but your LLC isn't the reason you file a separate return. Your partnership is. An LLC doesn't change a single thing with the way you file.
And even in a partnership the income is still mixed with your personal income on your return. It’s a pass through entity and your share of the profits or losses pass through to you the same way they would in a sole proprietor.
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Martinis Jackson
Hyattsville, MD · Member since 2013 · 42 posts · 17 votes
8y
@Josh Bauerle I disagree. 1) pass-through entities are referenced in the New Tax plan, you can read the article for references (http://www.dontmesswithtaxes.com/2017/12/how-taxes-on-pass-through-businesses-would-work-under-the-gop-tax-plan.html) 2) An LLC changes quite a bit about how you file, because you can elect how you want to be taxed when you create an LLC, you cannot do this a sole proprietor. Obviously, if you elect to be taxed as a C-corporation that will change your tax liability given the new tax rates for corporations, the same is true for other tax elections as well. The LLC allows you to elect how you're taxed, so to say it has no impact on your taxes or does not change your benefits under the tax plan does not make a lot of sense to me.
Also, the IRS states "An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation." Not all LLCs have only one member, in fact, mine does not. The ones that do not can be pass-through entities and will have tax advantages under the new plan.
I hope this helps.
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
@Martinis Jackson I'm a CPA and what you are saying is not accurate.
A sole proprietor is a pass through and clearly included in the new tax plan benefits.
Yes, an LLC can make a different tax election, which a rental company would never do. And either way, the LLC itself changes nothing with taxes. You can make a different tax election with or without an LLC. Which again, wouldn't happen in this case with rentals.
ALL LLC's are disregarded. The IRS does not regard LLC's as an entity. When you have an LLC with more than one member the IRS regards it as a partnership, not an LLC. And again, there are zero benefits under the new plan for LLC's as opposed to sole props. ALL entities, except C Corps, are pass through entities. This includes sole props, partnerships and S Corps. Regardless of which one you are, you will receive the 20 percent reduction of profits under the new plan.
I'm not trying to pick nits here, there's just a lot of bad info out there on LLC's when it comes to taxes. There is zero tax benefit to having one and the IRS doesn't recognize an LLC as a taxable entity, whether it is one member or one thousand members.
The one and only benefit to an LLC is the potential legal protection.
5 Reply
Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
Originally posted by @Tom Gimer:

LLCs are what people form rather than actually buying real estate.
Most accurate statement I've ever seen about LLC's.
And applies to all businesses, not just real estate.
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Martinis Jackson
Hyattsville, MD · Member since 2013 · 42 posts · 17 votes
8y
Josh Bauerle it's good to hear that you are a CPA. I have a question, can a sole proprietor elect to be taxed as a corporation? Is a corporation taxed at the same rate as a sole proprietorship under the new tax plan?
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
@Martinis Jackson An S Corp is taxed the same as a sole prop under both the new and old plans. A Corp is taxed differently than a sole prop under both plans. Neither an S Corp or a C Corp would be a proper entity for a rental business under either plan.
And you don't need an LLC to be taxed as either an S Corp or a C Corp.
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Martinis Jackson
Hyattsville, MD · Member since 2013 · 42 posts · 17 votes
8y
Josh Bauerle who on this thread specified that we were only speaking about rental businesses?
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
@Martinis Jackson The OP...
"but can anyone help me understand the llc aspect of real estate?"
Regardless, an LLC still has no tax consequences in any type of business. Yes, if you elect to be taxed NOT as an LLC there could be a difference. But you don't need an LLC to do that. So the point remains, and this is a very clear fact, an LLC has no tax impact.
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Josh Bauerle
Rental Property Investor · Willard, OH · Member since 2017 · 43 posts · 56 votes
8y
I see, you are saying other forms of real estate could be included besides rentals. Fair enough.
An LLC would still have zero tax consequences.
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Jesse Aiken
Erie, PA · Member since 2016 · 39 posts · 17 votes
8y
Forget tax implications regarding rental properties purchased within an LLC. They are negligible if any at all. Not sure how this became a discussion about taxes.
The main reason would be to separate and protect your personal assets from your rentals by purchasing property under an entity vs. In your own name. The idea is that it creates a layer of separation so that in the case that you get sued or go into foreclosure, your personal assets are protected as long as the cooperate veil of the LLC cannot be pierced. If the veil is pierced, then your personal assets are not protected anyway.
LLC's are a good idea (especially under certain circumstances, ie: purchasing property with a partner, a larger multifamily, or high risk scenarios) but not necessary if you don't have a bunch of assets and are purchasing a rental property with 4 units or less on your own.
The main thing I would be concerned with is that it is difficult to obtain conventional 30 year financing for a property purchased in an LLC and you will probably need to go with a commercial product with a shorter term and slightly higher interest.
In my opinion, it is better to purchase your first few properties in your own name in order to obtain the more favorable financing terms. Some would disagree, but it depends on the amount of personal assets you have to protect and your level of risk tolerance. This only applies if the properties are 4 units or less. If it is more than 4 units, then you will most likely have to go with a commercial product anyway so might as well go ahead and create an LLC.
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