As you’ve gotten into the world of real estate investing, you’ve no doubt learned a little bit about liability. After all, if you personally borrow funds for one of your house flip projects, then you’ll be responsible for paying that money back, even if the house you borrowed it for doesn’t sell. In most cases, that kind of loan—either through a private lender or a hard money lender—will be a secured loan, so the property itself will be the collateral. However, if the property doesn’t cover the amount of the loan, the lender may come after you and try to seize your income or assets.
The threat of being held liable for the capital put into a failed deal is enough to send a lot of people running to form an LLC, but is it really a good idea? Or should you stick to investing as an individual? To understand which way to go, it’s helpful to first understand exactly what an LLC is.
What Is an LLC?
LLC stands for limited liability company. Basically, with an LLC, you’ll have pass-through taxation, so as far as your taxes go, you’ll still basically be an individual who’s the sole proprietor of your business. The big difference when forming an LLC is that you’ll limit the personal liability you have for your business’ actions. That gets us to the pros and cons of forming an LLC for your real estate investing business.
Pro – Protect Your Personal Assets and Grow Your Business
With an LLC, you can keep your personal belongings, assets, and funds separate from your real estate investment business. That way, if something terrible happens to the business, your personal assets will be largely left alone.
At the same time, there’s no limit on the number of owners an LLC can have. That means, if you decide to partner with another investor, you won’t have to go through the process of dissolving your LLC and creating a new entity. Instead, you can just add them as an owner, and you’ll both be protected under the company.
Con – You Have to Have Separate Accounts for Personal and Business Funds
If you’re operating as an individual investing in real estate, you can just use your personal bank account for your capital. If you form an LLC, you’ll have to open a new business account specifically for your company. This can get a little bit more complicated as far as dealing with your finances, and you might end up owing your accountant more at tax time, as well.
Pro – It’s Cheaper and Simpler than Incorporating
Another option would be to incorporate your business, but that comes with a lot of changes that you might not be a big fan of. And it’s more expensive than forming an LLC, too. An LLC is probably the most cost-effective means to protect yourself and your business.
Not only is forming an LLC cheaper than incorporating, but it also involves a lot less paperwork. In general, if you’re looking for the fast and easy way to get the benefits you need from incorporating without actually going through the hassles of incorporating, then forming an LLC is the way to go.
If you’re only flipping houses to make extra money on the side, forming an LLC may not make sense. However, if you’re planning on turning your real estate investing business into a full-time job with multiple simultaneous flips each month or each quarter, you might want to consider it.
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