An LLC, or Limited Liability Corporation business entity, provides a strong measure of security from lawsuits, as only the assets of that business can be pursued and not the individual members. While fairly inexpensive to start, it can be time-consuming at the beginning while everything is formalized on paper. However, the financial and legal benefits far outweigh the time spent in preparation, especially for those investing in real estate.
Choose a name for the real estate LLC and register this with your state, ensuring that the name is available before starting any other paperwork.
Determine how each member of the LLC will contribute to the business, including the percentage of funds or services toward the purchase and management of each property purchased. This becomes the "Operating Agreement" when written down. Each member needs to sign the form, showing agreement with the rules being set forth, and their contribution.
Write up an "Articles of Organization" for the business. This is considered the company's charter, and outlines: 1) the name of the business; 2) the nature of the business (real estate purchasing and managing); 3) who will be the "agent" for the business, signing the paperwork at property closings, for example; and 4) the name of all members. This must be filed with the Secretary of State for approval, with a fee typically ranging from $100 to $400.
Set up the financial workings for the group, including: 1) opening a bank account in the business name; 2) writing up a financial plan to show the banks how down-payments will be acquired for properties, how those properties will be managed, what type of rents are expected, and how the group plans to be profitable; 3) applying for financing once the financial plan is complete; and 4) setting up a record-keeping plan for tax purposes, which can be somewhat complicated for real estate investing. The group may wish to hire an accountant, or use a software book-keeping system specifically tailored toward purchasing and managing rental properties.
Hold regular meetings (at least quarterly) and keep notes on what was discussed, showing proof that the LLC is a working business partnership if it is ever in question. Meeting discussions should include any properties being regarded for purchase; any purchases of rental properties made; pending rental applications; newly-signed leases; tenant and/or repair issues; and profit and loss of the group.
For the greatest protection, have each rental unit assigned to a separate LLC.
Beginning a business with anyone can be tricky; make sure that each member can contribute what they claim to the business.
Additionally, make sure to formalize how members can leave or enter the LLC in the Operating Agreement, should someone decide to leave later, or new members wish to be added.
- for sale sign image by Attila Toro from Fotolia.com