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Incorporate a Real Estate Company or Form an LLC

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The following real estate business case studies address common issues facing today's real estate investors. Did you know that you can protect your personal assets by forming a limited liability company with The Company Corporation and get more for your money? More real estate investors than ever are turning to us to set up LLCs, backed by our exclusive $50,000 Guarantee at no extra cost.

If you are wondering how to incorporate as a realtor, we will walk you through the example below.

I am a first time real estate investor buying a vacation property that I intend to rent out during summers but use myself during the off season. I bought the property with my own down payment and mortgage. Should I form an LLC? Should I incorporate my rental property as a business?

One of the chief reasons to incorporate a rental property is to protect the investor from personal liability. When you're looking to form an LLC or incorporate real estate, both can help offer protection to personal assets in the event of a lawsuit, but we find that most investors choose an LLC to hold their investment real estate. If the LLC is formed and managed correctly and there is a claim or lawsuit relating to the real estate, then generally only the assets owned by the LLC, and not the investor's other personal assets, will be subject to the claim or lawsuit. The Company Corporation can help protect an investor's other personal assets by properly forming the LLC and you helping to ensure that it is properly maintained.

Although both an LLC and a corporation can help protect an investor from liability, we find that most investors choose an LLC to hold their investment real estate. An LLC can offer more freedom in the management of the property. For example, in the LLC operating agreement, the investors can expressly set forth and/or limit the rights, powers and obligations of the manager and the members. An LLC also may not require some of the formalities of a corporation, such as annual meetings. In addition, an LLC may have tax advantages over a corporation, such as an LLC with only one owner may not have to file a separate tax return and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate tax return.

If so, do I need to sign the property over to the LLC or move the deed into the LLC?

In order to get the maximum protection afforded by the LLC, many customers transfer the property to the LLC so that the LLC becomes the owner of the property. If the title is not transferred to the LLC, and there is a claim or lawsuit relating to the property, then the owner of the property may be personally subject to that claim or lawsuit and other assets may be at risk.

Property owners should be aware that there may be costs associated with transferring the property to an LLC. In addition, when the property is used as collateral for a loan, the property owner will likely need to obtain the lender's consent for any transfer of the property.

What happens with the mortgage that I am personally liable for?

It depends in large part on the lender holding the mortgage and the relationships with that bank. A lender may allow the LLC to assume the loan and mortgage, either with or without changes to the terms of the loan. Alternatively, a lender may require that the LLC obtain a new mortgage in the name of the LLC, and that the personal mortgage be repaid with the proceeds of that new mortgage. In either case, because the loan is being made to an entity and not to a private individual, the lender may request that the member(s) of the LLC provide a personal guarantee or additional collateral. The exact terms, conditions and loan options will vary depending on the lender and other circumstances.

I am a first time real estate investor buying a residential property. I am renting the property to a family that signed an annual lease. Does this particular scenario change the answers to the Vacation Property Case Study in any way?

Generally, everything discussed under Vacation Property Case Study describing how and why to incorporate a rental property would also apply to this scenario. However, in cases where there is already a signed lease agreement, in addition to forming an LLC and transferring the deed to that LLC, many customers transfer or "assign" the lease to the LLC so that the LLC, and not the customer personally, becomes the landlord. However, the lease may contain a provision that prohibits, limits, and/or conditions such a transfer or assignment. If such a provision exists, the consent of the tenant may be needed to transfer the deed or assign the lease to the LLC. The terms of the lease should be carefully reviewed by a qualified person (such as an attorney) before attempting to transfer the deed or assign the lease to the LLC.

Should I form an LLC?

Whether you are looking to form an LLC or incorporate a real estate business, both options bring great advantages. Many of our real estate investor customers form an LLC to hold and manage their real estate in order to protect their other assets from liabilities or lawsuits that might result from their real estate investment. If the LLC is formed and managed correctly and there is a claim or lawsuit relating to the real estate, then generally only the assets owned by the LLC, and not the investor's other personal assets, will be subject to the claim or lawsuit. The Company Corporation can help protect an investor's other personal assets by properly forming the LLC and you helping to ensure that it is properly maintained.

Although both an LLC and a corporation can help protect an investor from liability, we find that most investors choose an LLC to hold their investment real estate. An LLC can offer more freedom in the management of the property. For example, in the LLC operating agreement, the investors can expressly set forth and/or limit the rights, powers and obligations of the manager and the members. An LLC also may not require some of the formalities when you incorporate real estate, such as annual meetings. In addition, an LLC may have tax advantages over a corporation, such as an LLC with only one owner may not have to file a separate tax return and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate tax return. While the decision is yours to opt for an inc vs LLC where it concerns real estate, The Company Corporation is available by phone to provide you with information on what others in your situation are doing.

If so, do I need to sign the property over to the LLC or move the deed into the LLC?

In order to get the maximum protection afforded by the LLC, many customers transfer the property to the LLC so that the LLC becomes the owner of the property. If the title is not transferred to the LLC, and there is a claim or lawsuit relating to the property, then the owner of the property may be personally subject to that claim or lawsuit and other assets may be at risk.

Property owners should be aware that there may be costs associated with transferring the property to an LLC. In addition, when the property is used as collateral for a loan, the property owner will likely need to obtain the lender's consent for any transfer of the property.

What happens with the mortgage that I am personally liable for?

It depends in large part on the lender holding the mortgage and the relationships with that bank. A lender may allow the LLC to assume the loan and mortgage, either with or without changes to the terms of the loan. Alternatively, a lender may require that the LLC obtain a new mortgage in the name of the LLC, and that the personal mortgage be repaid with the proceeds of that new mortgage. In either case, because the loan is being made to an entity and not to a private individual, the lender may request that the member(s) of the LLC provide a personal guarantee or additional collateral. The exact terms, conditions and loan options will vary depending on the lender and other circumstances.

Whether the LLC is permitted to assume the personal loan or the lender grants a new loan to the LLC, the bank will likely require that the deed to the property be transferred to the LLC and that the property be pledged as collateral for the loan.

How much might it cost to transfer that deed?

The cost to transfer a deed to an LLC will depend at least in part on where the property is located. It is necessary to prepare a deed in the LLC's name. That deed normally must be recorded in the appropriate office (typically the Recorder of Deeds in the county where the property is located) and the applicable filing fees paid. Additionally, depending on the location of the property and the parties involved, there may be realty transfer taxes or other taxes associated with transferring the deed to the LLC. Based on the circumstances, the total cost can vary significantly from a small filing or recording fee to thousands of dollars in transfer or other taxes. As previously noted, if the property is subject to a mortgage, the consent of the lender may be required to transfer the deed.

I am a wealthy individual, I live in Delaware, and I am buying seven different vacation condo units in Ocean City, MD. What entity structure should I use to minimize liability?

Many of our real estate investor customers form an LLC to hold and manage their real estate in order to protect their other assets from liabilities or lawsuits that might result from their real estate investment. If the LLC is formed and managed correctly and there is a claim or lawsuit relating to the real estate, then generally only the assets owned by the LLC, and not the investor's other personal assets, will be subject to the claim or lawsuit. The Company Corporation can help protect an investor's other personal assets by properly forming the LLC and helping to ensure that it is properly maintained.

Although both an LLC and a corporation can help protect an investor from liability, we find that most investors choose an LLC to hold their investment real estate. An LLC can offer more freedom in the management of the property. For example, in the LLC operating agreement, the investors can expressly set forth and/or limit the rights, powers and obligations of the manager and the members. An LLC also may not require some of the formalities of a corporation, such as annual meetings. In addition, an LLC may have tax advantages over a corporation, such as an LLC with only one owner may not have to file a separate tax return and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate tax return.

Which state or states?

Although investors often form an LLC or corporation in the state where the properties are located, some investors elect to form the entity in another state, such as Delaware. The laws relating to LLCs and corporations vary by state, and therefore, it is important to understand the law of the state in which the entity is formed. For example, only some states (such as Delaware) permit series LLC, but a Delaware series LLC can be used to hold property located in other states. The decision as to where to form the entity may depend on numerous factors, including tax considerations. In addition, it may be necessary to register the LLC or corporation to do business in the state where the property is located if the entity is formed in a different state. The Company Corporation can help investors form an LLC or corporation in any state, and can also assist with registering the entity to do business in any state.

What if I am buying the properties with cash?

The fact that a real estate investor is purchasing properties with cash should not affect whether or not he or she forms an LLC or corporation to hold the properties. Generally, the cash can be contributed to the entity, which may then purchase the property and take the title directly.

What if I am putting 20% down and financing the rest?

An LLC or corporation owned by one or several investors may apply to a lender for a loan. The real estate purchased by the LLC or corporation typically must be pledged as collateral for the loan. In addition, because the loan is being made to an entity and not to a private individual, the lender will often request a personal guarantee or collateral from one or more of the investors. Banks and mortgage companies typically make lending decisions based on the borrower's credit. A strong debt repayment history, a good debt-to-income ratio and sufficient assets to act as collateral are what banks usually look for when they make lending decisions. This is true regardless of whether the borrower is an individual, an LLC or a corporation. Lenders will provide real estate loans to investors, but generally they associate more risk with an investment property than a mortgage for a personal home purchase. Consequently, investors must often pay higher interest rates on an investment property regardless of whether they buy the property as an individual or through an LLC or corporation. Loans for the purchase of investment properties generally will require a larger down payment, often in the neighborhood of 20 to 25 percent. Exact terms, conditions and loan options will vary from lender to lender.

Should I do it personally or through the entity or entities that are formed?

As explained above, lenders will provide loans to LLCs and corporations in connection with real estate investments. Generally, it is preferable to have the entity that owns the property obtain the loan directly. Among other reasons, if the entity is the borrower, the investors will not likely be personally liable for amount of the loan -- assuming that they did not provide a personal guarantee.

My friends and I have formed a real estate investment club. We recently purchased our first property and we each have equal ownership of the property. We've heard it's best to form an LLC, but does that apply to multi-investors as well?

The benefits of forming an LLC, which are explained below, apply with equal or greater force to multi-investor situations. If you are looking to incorporate for real estate, forming an LLC has become increasingly more effective and popular. Each investor has a strong interest in attempting to ensure that their personal assets are not subject to claims relating to the real estate investment. In fact, absent forming an entity such as an LLC for their investment, the investors could be deemed "partners" and, as a result, could be liable for the actions of the other investors. In addition, as previously explained, an LLC offers the parties significant flexibility in the management of the property, which is very helpful in multi-investor situations. For example, in the LLC operating agreement, the investors can expressly set forth and/or limit the rights, powers and obligations of the manager and the members. The Company Corporation can help protect an investor's other personal assets by properly forming the LLC and helping to ensure that it is properly maintained.

Many of our real estate investor customers form an LLC to hold and manage their real estate in order to protect their other assets from liabilities or lawsuits that might result from their real estate investment. If the LLC is formed and managed correctly and there is a claim or lawsuit relating to the real estate, then generally only the assets owned by the LLC, and not the investor's other personal assets, will be subject to the claim or lawsuit. The Company Corporation can help protect an investor's other personal assets by properly forming the LLC and you helping to ensure that it is properly maintained.

When you are looking to form an LLC or incorporate for real estate, both can help protect an investor from liability, but we find that most investors choose an LLC to hold their investment real estate. An LLC can offer more freedom in the management of the property. For example, in the LLC operating agreement, the investors can expressly set forth and/or limit the rights, powers and obligations of the manager and the members. An LLC also may not require some of the formalities of a corporation, such as annual meetings. In addition, an LLC may have tax advantages over a corporation, such as an LLC with only one owner may not have to file a separate tax return and its profit or loss can be included on the owner's tax filing. In contrast, a corporation must file a separate tax return.

I am a licensed independent agent. Should real estate agents incorporate? What are the benefits to incorporating for a professional in my line of work?

If you want to learn more about how to incorporate yourself as a realtor, it is best to speak with your accountant, as well as The Company Corporation's team of experts to help you weigh the pros and cons. The Company Corporation can help you better understand tax matters, annual expenses, and specific that may be involved and whether incorporating is right for you at present.

Many of the benefits associated with an independent real estate agent incorporating are tax-related, such as the ability to pay yourself a dedicated salary and set up health retirement benefits. Additionally, incorporating also enhances your professional image and (as is the case with many small businesses that choose to incorporate or form an LLC) can entice more clients to want to do business with you as a respected corporate entity, as opposed to an agent operating independently from a larger agency.

A realtor's decision to incorporate can also help offer a certain level of personal protection from lawsuits as a result of a lease in default or other potential liabilities that may crop up. To gain a better understanding of what sort of protections are offered to you by incorporating or forming an LLC, please speak with one of The Company Corporation's representatives who can give you more specific information tailored to your business needs.

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