Pros and Cons of starting an LLC
It can be tricky and scary to enter into an industry as big as Real Estate. One of the biggest challenges can be figuring out how and where to start. To help you out, here we have a list of advantages and disadvantages of creating an LLC to manage your properties.
First, let’s define what an LLC is. A Limited Liability Company is a legal business structure that allows all its members to have the flexibility and simplicity of a partnership, while having the limited liability protection of a corporation. LLCs can have as many members as needed and it exists as a legal entity from all of them.
Advantages:
Legal Asset Protection
Typically, members cannot be held accountable for the actions of the LLC. This means that any personal asset (such as properties, accounts or credits), cannot be used by creditors or others to pay debts incurred by the company.
Pass-through Federal Taxation
The income made by the LLC goes directly to its members (unless otherwise stated) and each of them reports and pays taxes personally. This can make filing taxes easier than if it needed to be done at the corporate level.
Flexibility in the management and decision making
This structure allows you to manage the corporation yourself, manage it with the other members or hire a professional manager. Having this flexibility can lighten the burden of everything being over one person’s shoulder.
Disadvantages:
Cost of upholding it
Most times, forming and maintaining an LLC can be higher than a sole proprietorship or a partnership. A lot of States, including Texas, charge a fee for filing and registering an LLC.
Also, the IRS considers an LLC a partnership for taxation purposes, which means the members are considered self-employed and they have to pay taxes accordingly.
Hard to transfer ownership and membership
In many States, if something happens to a member of the LLC, it has to be dissolved and the remaining members are responsible for any issues that remain, and they need to create a new LLC if they decide to stay in business together. Adding members can be very difficult, since every member must approve it.
If you have any questions or need help managing your property, don’t hesitate to reach out!
