How to Write the Articles of Organization for your LLC
- Limited liability companies (LLCs) are entities that protect owners from personal liability for their business’ debts.
- If your rental property assets are covered by an LLC, your personal property is protected.
- Discover more benefits of an LLC and how to form one for your real estate property assets.
This article is designed to convey information and not to provide legal advice. You should not consider any information in this article to be legal advice. Readers should consider obtaining specific legal advice from an attorney about any decision or contemplated course of action.
As a real estate investor, you are potentially open to legal action in the event of an injury accident on one of your properties.
Let’s say one of your tenants throws a party and a guest takes a spill over a balcony. As the owner of the property, you could be named as a defendant in any resulting legal proceedings.
If your real estate property assets are held through a Limited Liability Company (LLC), the amount of any potential judgment against you will be limited to the assets of the LLC.
In other words, your home and other personal property are protected. Plaintiffs can only come after the assets of the business.
While liability insurance also provides protection, it usually comes with limits and exceptions.
If those limits are exceeded or the exceptions are applicable, you’ll be stuck with the balance of the liability—unless you’re also incorporated as an LLC.
Forming an LLC for your real estate investment activities also carries tax advantages. Even though LLC status offers corporate-like insulation from liability, the LLC is taxed like a partnership.
Income and capital gains are only taxed as they accrue to the owner, rather than both the company and the owner (as is the case with a corporation).
The owner, then, pays taxes as an individual. This is referred to as “Pass-through Taxation”.
Tax liability passes through the LLC directly to the owner(s), as it would in a sole proprietorship or a partnership.
This tax structure also offers the advantage of mortgage interest deductions, which is beneficial for real estate investors.
Anyone who has had a casual conversation about incorporating a business has likely been made aware of how easy it is to incorporate in Delaware.
However, Wyoming or Nevada offer more significant advantages for real estate investors such as anonymity. . If people don’t know who you are, it’s a lot more difficult for them to come after your assets.
Even better, neither Nevada nor Wyoming imposes taxes, and both permit one person to hold all offices in a company.
Now that you’ve seen the benefits, let’s look at how to form an LLC.
Components of an Articles of Organization
- LLC Name – The LLC can be given any name as long as it complies with the rules of the state where the company is formed.
- Purposes and Powers – You’ll be required to make a statement about what the company does, and the nature of the company’s activities.
- Resident Agent Address – This establishes a physical location for the business within the state.
This should be the address of the Registered Agent or the individual to whom papers will be served in likely lawsuits involving the LLC. You’ll also be required to provide the name(s) of the owner(s).
- Operating Agreement – While not a legal requirement, an operating agreement is a good thing to have if you’re in a partnership.
- Public Notice – Depending on the state, you may be required to publish a notice in a local newspaper stating your intention to form the LLC. There are also requirements that govern how often to publish this.
- Licenses & Permits – Depending on the laws in the city and state within which you establish your enterprise, you may be required to get a business license or tax registration certificate, a federal employer ID number, and other relevant permits.
Naturally, if anonymity is your goal, you’ll want to avoid using your name or your family members’.
Although, you do have to make sure the name is unique to your organization in your state as it can’t be the same as any previously registered company there.
You also have to be careful to avoid using words like “Bank,” “Insurance,” “Corporation,” or “City.” Different states have different rules regarding this so it’s best to see what applies in your particular circumstance.
Most states offer a form of unlimited purposes and powers, meaning your organization is free to engage in any legal business activity.
It outlines how much of the business each partner owns, the rights and responsibilities of each party, the rights of survivorship, voting power, allocation of profit and losses, management of the LLC, and rules for meetings and votes.
Given the liability protections and tax advantages, forming an LLC to cover your real estate investing activities makes sense.
Depending on the state you choose to establish your company in, the fees can be quite affordable, compared to the possible liability your company could face.
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