Forming an LLC to purchase Chicago Property or investing as an individual.
In real-estate investing, it is common practice for owners to create a Limited Liability Company (LLC) and buy property under this LLC company. This is because many owners prefer to purchase real estate—or transfer the title(s) of real estate from an individual to the LLC—so that the LLC becomes the legal owner of record and not the individual. You can create an LLC by yourself, with a partner, or with a group. If you own an LLC, you are a “member” of the LLC. LLC entities are regulated on a state level, so the process of creating an LLC will differ by state.
There are several advantages of creating an LLC and purchasing real-estate through such a business entity.
1. Professional Privacy
As a business owner, you might find the privacy of the LLC structure appealing when you buy a home with an LLC. Buying a house under an LLC ensures that the LLC’s name, not the owners’ names, appears on public documents and disclosures. In other words, LLCs allow you to replace your name with a corporate name, thereby concealing your identity and other information under the professional liaison of a company.
2. Limited Liability
Limited liability means that you, as the owner, will not become personally liable for the company’s debts or liabilities. Therefore, if you have a fear of lawsuits as a business owner or real estate investor, the LLC structure may look very appealing to you. However, limitations exist within the limited liability structure.
For example, living in a home owned by an LLC can “pierce the corporate veil.” This legal term means that the owners, shareholders, or members of a corporation or LLC can become personally liable for corporate damages, as if the LLC structure never existed.
3. Tax Benefits
The LLC structure can offer significant tax benefits, particularly because it eliminates double taxation. Double taxation refers to profits taxed at the business level first and then a second time at the personal level. Instead, LLCs enjoy a pass-through tax structure, which means that the LLC pays taxes on profits, but the owner of the LLC does not. However, LLC owners must pay taxes on their allocated share of profits.
4. Easier To Invest With Partners
The LLC structure makes it easier to invest with partners – even other investors who don’t know the LLC’s principal owner. Two people can launch an LLC as partners, a second member can simply join a single-member LLC and create a multiple-member LLC. Members can also sell LLC shares by having an existing member sell their shares to a new member. Members must distribute 100% of the shares of an LLC.
Keep in mind however that every silver living has a cloud, and there are some disadvantages to creating an LLC for investment purposes.
While LLCs are a great way to hold real estate, they unfortunately also have costs that go along with them. There is an associated cost to set up the LLC, and a responsibility to pay an annual fee of up to $500 to the state in which the LLC is organized. You may also have to file a separate tax return for the LLC. But the biggest issue you might have with an LLC is that lenders will consider your real estate ownership as an investment property. Once you fall into the investment-property bucket, the lending rules change and get more expensive.
With an LLC, the financial lender will send you to the commercial lending side of the bank. Generally, the interest rates and costs to finance your purchase are lower on the residential side than on the commercial side. Additionally, you may be able to borrow more against the property on the residential side than on the commercial side of a lender, where the down-payment requirement could be 35 percent or more.
