Buying land is an exciting prospect, but like any asset it has risks and rewards. What can investors do to mitigate some of the risk when buying a piece of land?
One option is to form an LLC for your real estate. Starting an LLC in Florida (or the state of your choice) can be one of the best ways to put together real estate holdings, offering a number of protections against onerous legal judgements or other unwelcome circumstances when buying land.
Choosing an LLC for Your Real Estate Investment
First things first: What is an LLC, and does this legal structure make the most sense for real estate and raw land investments?
Basically, an LLC is a legal structure that you can choose for a business venture, whether that’s an ecommerce store, a neighborhood deli, or a set of raw land holdings. You can choose to have a single-member LLC, composed of just you, or a multi-member LLC, featuring your business partners and associates.
One of the key distinctions of the LLC is that it actually creates a new business entity. This is not true of, say, a Sole Proprietorship, where there is no legal distinction made between the business and the business owner. The LLC allows you to consider your business venture, along with all of its assets and liabilities, to be different from your own personal assets and liabilities.
This has a number of important implications, starting with legal risk. If someone brings a lawsuit against your LLC, they cannot go after any of your personal resources, like your family home, your personal retirement account, or the savings account you share with your spouse.
Additionally, an LLC provides different options for tax representation. Most LLCs are taxed on a “pass through” basis, meaning you only pay for your share of the business profits on your personal tax return. In some situations, it may make more sense to be taxed at the corporate rate, an option that is available to LLCs.
LLCs and Real Estate
LLCs have long been used for real estate and raw land investments, going back to 1977 when Wyoming developed a series of LLC laws to benefit oil companies. Other states followed suit, and now every state has its own set of LLC laws for real estate investors.
This can potentially present a complication, as LLC laws vary a bit from state to state. Since most raw land investors are only worried about one or two states, however, it is seldom a real issue.
Why Choose an LLC for Raw Land Investments?
Again, the LLC structure can be a wise option for virtually any kind of business venture. The question is, what makes the LLC especially advantageous for raw land investments?
Consider three basic factors: Liability, taxation, and administration.
One of the most important reasons to choose the LLC structure for your raw land investment is that doing so reduces liability to the assets of the company, not the assets of the owner.
Here’s what that means practically. Say someone becomes seriously injured on a piece of land that you’ve added to your investment holdings. If that piece of land is your personal property, legally speaking, then you may face a judgment brought against you personally. But if the property is owned by the LLC, then any judgements rendered would affect the LLC’s assets only. Your personal assets would be shielded.
“Pass Through” Taxation
Something else to consider is that the “pass through” tax status reduces the taxation on rental incomes and any other money generated by properties held by your LLC.
When a corporation makes money, it has to pay taxes on its own income. Remaining profits go out to the owners and shareholders in the company, and they must pay further taxes on their personal income. The LLC allows you to avoid this double taxation. Each LLC member can simply count rents and other forms of income on their personal tax returns.
One additional benefit to choosing an LLC for your land investment: LLCs offer a great deal of flexibility with regard to paperwork and other administrative requirements.
While this is variable by state, it’s generally true that launching an LLC is fairly simple and inexpensive compared with other legal structures. That can be especially beneficial for those seeking to get their real estate business up and running ASAP.
Downsides to Using an LLC
While the LLC structure offers a number of benefits for buying land, there are also potential downsides. For example, you’ll need to pay a fee every year to keep your LLC active. The fee varies by state, but it’s usually pretty minor.
You should also note that there are instances in which the LLC’s liability protections can be breached by the court system, though this will usually involve serious evidence of fraud or other criminal activity on your part.
Reducing Your Investment Liabilities
The bottom line is that investing in any kind of real estate brings the potential for both risk and reward. Smart landowners look for any means possible to mitigate their risk… and that may mean establishing an LLC. Make sure you have a clear sense of both the benefits and limitations of the LLC structure.
Amanda E. Clark is a contributing writer to LLC University. She is a graduate of Eastern Michigan University and holds degrees in Journalism, Political Science, and English. She became a professional writer in 2008 and has led marketing and advertising initiatives for several Fortune 500 companies. She has appeared as a subject matter expert on panels about content and social media marketing. She regularly leads seminars and training sessions on trends and tactics in professional writing.
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