Why Investors Structure Their Business Under LLCs
With so many benefits, it’s amazing to see so many real estate investors still questioning whether they should be forming and investing through LLCs or not.
These advantages might not be exclusive only to Limited Liability Companies, and may equally apply to similar legal entities, but the premise remains the same. However, so many investors continue to put it off and question the formation of their own LLC. While it is perfectly possible to invest in real estate without forming an LLC, it is a smart first step. It is so much easier, faster, and less expensive than most think. Sooner is better than later, even if seeking one of the benefits these vehicles offer, and waiting might void them all. So why should all real estate investors be considering LLCs? What are the benefits?
Who doesn’t want tax breaks? You can make more money than you used to, and pay far less taxes if you invest in real estate. Real estate might be a natural choice for those looking to lower taxes, and it has many built-in opportunities for write-offs. However, an LLC or similar structure can potentially offer yet another whole layer of these breaks that the IRS expects individuals to take advantage of. Anything else is just voluntarily overpaying.
For some real estate investors, the privacy perks LLCs afford them can be more than reason enough to set one up. Investing in your personal name means having it blasted publicly across the internet forever. In most countries, that makes it accessible to the whole world for free.
An LLC helps separate personal from business finances. This reduces liability even further. It means that if your business is ever negatively impacted, it is less likely to destroy your personal life and finances. Similarly; if you are personally hit by divorce, financial struggles, or malicious lawsuits, your business and investments will be far better protected and preserved.
The separation of personal and business investment income means not only better organization, but also reduced bookkeeping needs. You’ll keep a lot more of your hair at tax time, won’t have to take as much time out to decipher records, and won’t have to shell out as much for a bookkeeper and accountant. It could mean the difference between needing a full-time, in house bookkeeper and being able to roll the expenses into your normal tax prep fees.
Value and Capital Gains
This is a huge benefit of LLCs, and one that is all too often ignored. Organizing and incorporating means having a business, and being a business owner. This means simultaneously being able to build value in a business while going about your regular investment activity. For some, that could mean building millions, or even billions in business value, while enjoying all the other benefits of investing in real estate. Some may even see this gain eclipse their investment activity if they get their branding right.
Another seriously underestimated perk of using an investment vehicle such as an LLC is long term continuity. What happens if you are unexpectedly incapacitated (short or long term)? An entity can keep on living and giving to those you love. It can be more easily taken over, managed, transferred, or operated by someone else.
In summary; the benefits and advantages of LLCs are plentiful and powerful. There is serious value to gain in forming them, and even more risk of neglecting their importance. You can invest without them, but why take the risk, and suffer subpar returns, when you could be doing better? Investigate your options, keep it simple, and take your real estate investing to the next level.