How to Create a LLC

Of all the questions that I receive about real estate investing, the question of LLC for real estate investing has to be one of the top ones. Basically the question is: “Should I start an LLC for real estate investing?” 

The basic answer is yes AND I'll show you how to start yours for only $29!

BUT it really depends on many factors. The persons goals, investment strategy, current finances, and many others.

What I ALWAYS teach my investing students is that they should create an LLC for real estate investing and specifically create a LLC for real estate investing.

A Limited Liability Company (LLC) is one of the most preferred entities to have your company structured in. There are others like S-Corporation and C-Corporation but an LLC for real estate investing is one of the best entities to hold your real estate rental properties in.

With any business entity, you own the company and the company owns the properties. There are many benefits to this such as liability, financing, on top of many others.

Table of Contents Show

LLC for Real Estate Investing Decreases Liability

What it basically comes down to is how spread out you want your liability to be. If you have $500,000 in assets in one LLC for real estate investing, it may be time to create a new one.

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Everything that the LLC owns is open for the taking in a lawsuit. It would be fine to have your LLC own properties and another business but be aware that you could have issues in the future with a lawsuit going after more than just one property or one business.

Pro Tip: $250K

A good rule of thumb would be to create a new LLC for every $250,000 in assets.

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Different Ways to Hold Title In A Property

When you do start investing, how should you hold your properties?

What is the entity that you should hold it in?

There are many different ways that you can hold the title of a specific property. Most people buy a home to live in and put it in their personal name and they are the owner of the property.

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Now, with the benefits of capitalism and having a free market, you can have a company you own that owns the property. There are many different reasons, pros and cons, of doing this. So having an LLC for real estate investing is a very wise decision for investors.

Most people put properties in their personal names, but I personally suggest that you don’t do that. However, if you do, you will still be protected with insurance and liability insurance.

Everything I am talking about here is the knowledge I gained from talking to professionals. I am not a professional accountant, lawyer, or asset protection guru.

Don’t take my words for gospel, do your own homework and figure out exactly what you need for your situation. Talk to attorneys and accountants to make sure your business set up best for your scenario, because your situation is probably different than mine.

This is what I do and what I recommend my students do, but I still recommend that they talk to an attorney and accountant.

Don’t trust me, trust your attorney and accountant.

How to Create a LLC Easily A Step-by-Step Guide

This is the step-by-step process showing you how to create a LLC on your own. Creating an LLC is quick, inexpensive, and you can do it yourself.

  1. Choose a Business Name:
    • Select a unique and distinguishable name for your LLC. Make sure it complies with the naming regulations of your state.
  2. Check Availability of the Name:
    • Verify the availability of your chosen business name by searching the business name database in your state.
  3. File Articles of Organization:
    • Prepare and file the Articles of Organization with the appropriate state agency. This document typically includes details such as the LLC's name, address, purpose, and members/managers.
  4. Choose a Registered Agent:
    • Designate a registered agent who will receive legal documents on behalf of your LLC. The registered agent must have a physical address in the state where your LLC is registered.
  5. Create an Operating Agreement:
    • Although not always required, it's advisable to create an operating agreement that outlines the ownership structure, member responsibilities, and operational procedures.
  6. Obtain an Employer Identification Number (EIN):
    • Apply for an EIN from the Internal Revenue Service (IRS). This number is used for tax purposes and is necessary if your LLC has more than one member or if it hires employees.
  7. Comply with State and Local Requirements:
    • Ensure that you meet any additional state or local requirements, such as obtaining business licenses or permits.
  8. Open a Business Bank Account:
    • Separate your personal and business finances by opening a business bank account. This is crucial for maintaining the limited liability protection of your LLC.
  9. Understand Tax Obligations:
    • Familiarize yourself with the tax obligations for your LLC. Depending on your situation, your LLC may be taxed as a sole proprietorship, partnership, S corporation, or C corporation.
  10. Annual Compliance:
    • Be aware of any annual reporting and compliance requirements in your state. Some states require LLCs to file annual reports or pay annual fees.
  11. Get Business Insurance:
    • Consider obtaining business insurance to protect your LLC from potential liabilities.

Remember to consult with legal and financial professionals to ensure you understand and comply with all the necessary requirements for starting and maintaining your LLC. Additionally, the steps and regulations may vary outside the United States, so if you're in a different country, be sure to research the specific requirements applicable to your jurisdiction.

If you want to learn how to use your LLC for real estate investing, check out this article and podcast I did showing you all the steps.

Pros and Cons for a LLC for Real Estate Investing

I definitely suggest having an LLC, which is a Limited Liability Company, for many reasons.

An LLC has many pros but a few cons as well.

However, I don’t think the cons are that bad, which is why I hold my properties in LLCs rather than in my own personal name.

Pros For An LLC For Real Estate

Asset Protection

An LLC provides asset protection for your property and for everything you personally own. This pro outweighs all of the cons!

Let’s say you have one real estate that you put in an LLC and you have your personal home that you put in your name. If somebody slips and falls at your property, it’s under the LLC.

The people who sue can only sue the owner of that property. If it is in your name, they can go after you personally, including your bank account, your personal home, your bank accounts, and anything you own.

If you hold that property in an LLC, the LLC will make sure it stops at the LLC.

Whatever the LLC owns gets sued. If you have 15 rental properties and have them split up into five different companies and someone slips and falls and sues, at most they can go after only what is in that LLC.

You need to protect all of your assets so you are well taken care of. That is a huge benefit!

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Tax Benefits of a LLC for Real Estate Investing

There are huge tax benefits for putting your property in an LLC. The LLC is basically a pass-through entity.

If you are a regular corporation, you would get taxed at the corporation level. Any money the corporation makes is taxed. Any money left over that is distributed to the owners gets taxed again.

An LLC doesn't have the two different taxes. It passes through the LLC and doesn’t get taxed. Once the money is distributed to the owners, it is taxed.

The pass-through of the money to the owner only gets taxed one time. This is a huge benefit! There is no double taxation.

Your Estate Planning with a LLC for Real Estate Investing

If you put all of your properties in an LLC, whoever owns the LLC is the one that actually gets the benefit.

If you and your spouse own the LLC for real estate investing, you can sell part of your company to your kids and they become part owners. Or, if you pass away, your kids can be beneficiaries of the shares you own in the company and those shares get transferred over to your kids.

The company still owns the properties and still owns the title, but the company changes hands.

Talk to your attorney and accountant to make sure everything is set up legally and all of the taxes are paid.

Try to avoid taxes as much as legally allowed. With estate planning, you also get out of estate tax. The estate tax is passed along to another person, but if it is in an LLC for real estate investing, they don’t get taxed on it.

Not only are you able to legally avoid taxes, an LLC for real estate investing allows you to pass the property to other people.

Cons For An LLC For Real Estate

Cost of Starting and Maintaining an LLC

If you put a property in your own name, there is no added cost. Putting the property in an LLC for real estate investing is an added cost.

To set up an LLC, you need to pay the franchise tax and fees to your state, but this cost is minimal. If you buy a $100,000 house, the cost to set up an LLC is about $100 or $200 at the most.

Would you pay $200 to save yourself $100,000? Of course you would! You would absolutely give someone $200 to save that much money. Don’t let this cost hold you back.

The cost is not a big deal.

Financing of Properties You Put in LLCs

Most residential loans don’t like having the entity held in a company name, because they want to have a person liable to pay the debt.

If you go out and try to get financing from a bank and tell them it is going to be in your company’s name, they will probably not want to do it.

It is much trickier finding financing to buy properties. It is not as easy as just putting it in your name.

It’s Not 100% Asset Protection

Having your property in an LLC is not foolproof. There are ways for someone to still sue you directly.

If the person suing you proves your LLC is not valid, you lose the protection of the LLC. However, it is a huge protection if you set it up right.

Due on Sale Clause

Let’s say you buy a property in Texas for $150,000 with a mortgage and six months later you decide to put the property in an LLC to protect it. If you do that, all mortgages today require payment of the loan balance as soon as there is a transfer of ownership.

When you put the property into a trust, that is not a transfer of ownership, because the trust is in your name.

When the property goes into another name, whether a company or a person, the due on sale clause can be implemented by the bank has recourse to collect the balance of the loan.

One option if you want to move your property from your name into your company name, and it has a mortgage on it, move it into a trust that the LLC owns. You own the LLC, the LLC is the trustee of the trust, and the property is in the trust. Don’t take my word for it, talk to your attorney!

I choose LLCs, because of all the pros I mentioned above. I make sure my assets are protected and I am protected from anyone that may want to sue me.

My personal opinion is to not choose corporations or S-Corporations, because there is a lot more that you may need to do as far a governance.

I use LLC for real estate investing because it is easy and cheap to do, and you get so much benefit out of it.

Where to Create Your Own the LLC For Real Estate Investing

The biggest question I get from my students and other people I talk to is “What state should I set up my LLC?”.

Personally, I like having my properties in Wyoming LLCs. Wyoming LLCs are so much better than any other state’s LLC. Delaware and Nevada have decent laws, but they are not nearly as good.

Wyoming is very business friendly, because they want businesses to be set up there.

Benefits of Having Your LLC for Real Estate in Wyoming

No matter where you live, you may set up your LLC in Wyoming. The only caveat is you need a registered agent that lives in the area.

I lived in California and bought properties in Ohio, Texas, and Arizona with the LLC I set up in Wyoming.

Travel to Wyoming to Sue

If something happens at one of my properties in Texas, they can’t sue me in Texas, because my LLC for real estate is in Wyoming.

They have to travel to Wyoming to sue me. They need to sue you in the state where the entity is formed.

This is another way your LLC will protect your assets, because an attorney will think twice about suing, since they will need to travel.

Tax Benefits

Wyoming has no corporate tax, no personal income tax, no franchise tax, low annual fees, no share certificate required, minimal filing fees, no business license fees, no Department of Revenue for taxes, no listing of your members and managers with the Secretary of State (your name is not actually listed with them), and no name-based searchable database to find you.

These are the reasons I chose Wyoming to set up my LLC for real estate investing. I’ve looked at Delaware and Nevada, but ultimately chose Wyoming. Do what is best for you!

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How to Create a LLC Easily

There are many companies that will do the work of setting up an LLC for you, and you just need to provide a few details like the name, location, and address.

Start your LLC for real estate investing for only $29!

The only thing a registered agent does is collect any mail that is sent to the company and send it to you. They are an intermediary that works on your behalf to get the mail.

I wrote an entire step-by-step guide that you can learn exactly how to do it here: How to Create a LLC for Real Estate Investing

What I Personally Do for My Business

This is how I personally hold my properties:

Multiple LLCs Own the Properties

Start Your LLC for Only $29!

I choose to have multiple LLCs own my properties, so I don’t have all 30 or 40 properties in one. I have different LLCs holding different properties, so I can spread it out.

If someone gets hurt at one property and sues the company, they sue the company that only owns three. They don’t go after every single property I own. You want to make sure the person suing can’t go after everything.

Get the Best Landlord Insurance and Umbrella Insurance For Your Real Estate Investing

Two Great Places to Get Landlord Insurance I MPI Recommend

I have worked with insurance companies to get the best prices for my audience and students and these two companies are the best.

Personally, I use Obie Insurance AND Steadily Insurance for my properties. Usually I get quotes from both and pick which one does the best.

Obie Insurance

Obie is reinventing the insurance process for landlords and rental property investors. Whether you're a seasoned investor or just starting out, Obie makes requesting a quote and getting coverage simple, affordable, and transparent.

Steadily Insurance

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What Umbrella Insurance Covers (and What It Doesn't) for Rental Properties

Landlord Insurance

I buy landlord insurance over the properties to make sure if anyone slips and falls, they will go after the insurance first. This is another barrier.

Umbrella Insurance Coverage

Umbrella insurance is very easy to find. I have this insurance over myself and over each one of the properties as an extra liability coverage, like $100,000 or $200,000.

It is very cheap. One policy I have covers around 30 properties and I pay around $1,500 a year. That is nothing for the amount of coverage that I get.

Other Ways to Protect Your Properties

The best thing to do is to not get sued in the first place. Here are some other ways to protect yourself against that happening:

Liability Insurance

Make sure you have landlord insurance on top of any other coverage that you have, to make sure you are not liable and the insurance company will pay for it.

Umbrella Insurance

Make sure you have umbrella insurance over you and the properties. This is an extra layer of protection.

Proactive Screening of Tenants

Make sure you find the best tenants you can, who live in the property and take care of it.

Proactive Repairs on the Property

Repair anything that is loose or broken. Be proactive on repairs, so nobody gets hurt. You don’t want to be a slumlord or for your properties to get dilapidated. You want the person living in the property to feel blessed to be at the property at a decent price.

Do Not Neglect Your Tenants or Properties

Don’t let your tenants feel like you are not taking care of them, because they will definitely sue if there are any problems. Don’t let your properties become dilapidated. Keep them up so people will want to live there.

Fix All Health and Safety Issues Immediately

When a health and safety issue comes up, make sure it gets fixed right away. Do not let that slide. If there is a broken stair, fix it! You do not want anyone to get hurt, because of your negligence.

As best as you can, try to make sure you never get sued.

This way you won’t need to worry that all of the protections you set up will hold. Make sure you don’t get sued and if you ever do get sued, make sure you are ready with all of these asset protections. 

Talk to your accountant and attorney to make sure your business is set up correctly!

**Disclaimer: These videos are informational only. I am not a lawyer so consult one for legal advice. Some links in this article may be affiliate links at no extra cost to you**

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