Investing in real estate can be a financially rewarding endeavor, but what you may not know yet is the best way to protect yourself as an owner. One of the options available to you is forming a limited liability corporation. Doing so comes with many benefits, but it also has its drawbacks. Reviewing the pros and cons of an LLC can help you determine if it is the best choice for your situation.
The top advantage of using an LLC is to protect personal assets in the event of a lawsuit or other scenario that puts your assets in danger of loss. This is why the corporation’s name is “limited liability.” Without it, you are at risk of losing more money because your personal and business assets are not separate. You can place each property under its own LLC to limit liability even further.
You may also experience tax benefits, depending on how you classify the LLC. In addition, you manage your properties like a business, helping you to be better organized, prevent comingling of assets, qualify for loans and receive other business perks.
Because an LLC is a business, you have business expenses to pay, such as setup fees and tax returns, especially if you have multiple LLCs. You may find that liability insurance is enough coverage for your circumstances, in which case, setting up an LLC would waste time and money. If you already have real estate under your name and want to move it to your new LLC, you may have to pay the remainder of the loan on the property.
It is also important to be aware that 100 percent protection is not a guarantee. There are many situations that can result in a lawsuit against you and put your personal assets (and/or other LLCs) in jeopardy.