WHAT DO YOU NEED TO KNOW BEFORE BUYING A REAL ESTATE THROUGH AN LLC?
Limited Liability Companies (commonly referred to as LLCs) may provide flexibility as to record-keeping requirements, potential tax benefits, limited liability for members, and easy management. In Florida, LLCs are frequently utilized to hold real estate. This article will provide an overview of LLC characteristics while assessing broadly the pros and cons of utilizing an LLC to make a real estate acquisition in Florida.
LLC in a Nutshell
A Florida LLC is a hybrid business association which combines the limited liability of a corporation with the flexibility of a partnership. An LLC is a separate legal entity from its owners.
Membership – Owners of an LLC are called “members” rather than shareholders or partners. There are no restrictions on the types of LLC members other than that a member cannot be a bank or an insurance company. An individual, a corporation, an s-corporation, another LLC, or even trusts can be a member of LLC.
Taxation – LLCs are commonly referred to as “pass-through entities.” Depending on the number of the members in the LLC the IRS will treat the LLC like a partnership or sole proprietorship for tax purposes. While single-member LLCs treated may be treated as a sole proprietorship, multi-member LLCs may be treated as a corporation.
Management – A Florida LLC is managed by its members unless the articles of organization or operating agreement expressly provides for the LLC to be manager-managed. A member manager, a nonmember manager, or a board of managers may manage an LLC.
Operating Agreement – operating agreement is the most important document of LLC as it regulates the business’ functional and operational decisions in addition to listing members and contributions and outlining clarity in how decisions will be made as well as how to handle disagreements among the members. Even though operating agreement is not specifically required in Florida for the LLC to be operational, it is wise to have one in any case. In the absence of an operating agreement, LLC is governed by the state’s default rules contained in the relevant statute and developed through state court decisions which continuously interpret the provisions contained in Florida’s Revised LLC Act.
Limited Liabilities of Members – the members of the LLC have limited liability for debts, obligations, and other liabilities incurred by the business. Members have protection from business debts, and they are not personally liable. This gives significant protection to members; hence it encourage investors to take risks in business. However, formalities of the LLC must be maintained for the courts to recognize the limited liability attached.
Formation – to form an LLC, the organizers must file “Articles of Organization” with the Florida Department of State – Division of Corporations.
It is time to talk about the main question – is it a promising idea for you to buy a real estate property through an LLC?
Well, the answer can be yes or no depending upon your purpose of purchase, with the key differentiating factor; Business purpose vs. Personal use. While you certainly can use an LLC to hold commercial real estate assets, it doesn’t always make sense for an LLC to hold residential real estate, especially when that real estate is for personal use. You may choose to utilize an LLC if you are purchasing an investment property to produce rental income from renting that real estate to third parties.
The Pros of Buying a Real Estate Through an LLC Liability – as detailed above, LLC can limit liability by protecting your personal assets. The lawsuit if any can only name the LLC and not the person. For instance, if you register the property under the name of your LLC then this will be the only asset that would be at stake if a tenant or association were to sue you. However, if your intention is not to rent the property and use it as a residential instead, buying the property through the LLC might not be the best idea for you.
Tax – LLCs allow pass through taxation if adequate under IRS code.
Privacy – If you want to stay anonymous on the records, buying a real property through an LLC will give you some privacy. If an LLC owns real estate under its business name, that’s the name that’s listed on the deed, and LLC members are not disclosed. However, it isn’t impossible for people to figure out who the owners are due to sunshine laws in Florida.
The Cons of Buying a Real Estate Through an LLC
Despite the advantages, buying a real estate under an LLC might not be the right decision for everyone.
Liability – In some cases, you could still be held personally liable even though assets are owned by a business.
Costs – While it is lucrative to set up an LLC, it’s important to know your plan when it comes to cost versus benefits in your state.
Financing – Unless you are paying in cash, financing is not easy. If it is a newly formed LLC – which is true in most cases, getting a mortgage financed can be extremely challenging. Conforming mortgages can not be made to entity, they must be made to individuals.
Transfer – It is possible to transfer an individually owned real property to an LLC. However, you need to be careful here on a particular clause– if your mortgage has a “due on sale” clause this transfer will trigger the clause as soon as you are no longer the official owner of the property and your entire mortgage becomes due right away.
Once you have determined your purpose, if you are considering purchasing real estate with an LLC, you should understand its implications. You need to consult an attorney with experience in your state, to ensure smooth operation and a hassle-free purchasing process.
If you are concerned whether an LLC would be favorable for you, need additional information or if you have decided to buy your property through your existing LLC feel free to contact us at to schedule a consultation so that we can guide you accordingly.
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