In 2023, a record of 5.5 million new business applications were filed in the US, and many of them were limited liability companies (LLCs). This is a popular business entity structure chosen by entrepreneurs since it offers personal liability protection, which is something that gives you more security.
If you’re getting into real estate investing, then it’s even more vital for you to separate your company’s assets from your own. Should you run into issues, you don’t want your personal assets at risk.
Those convinced of using this entity type may now be wondering which real estate LLC structure is the best. Below, we’ll go over the various structures so you can make a better-informed decision.
Single-Member LLC
A single-member LLC is owned by one person or entity. It’s the simplest form you can get for an LLC, and it’s often used for small-scale real estate investments. You can also use it for single-property ownership.
The advantage to having a single-member LLC is that there’s minimal paperwork and administrative effort. You’ll get personal liability protection and still enjoy a straightforward tax structure too.
The best part is that there’s room to scale up if needed. You can always add members and transition to a multi-member LLC (more on this later). So this makes a single-member LLC optimal for sole proprietors who are looking to invest in and manage one or a few properties.
Multi-Member LLC
A multi-member LLC has two or more members (they can be individuals or entities), and they share ownership of the company. Because there’s more than one member, you’ll need an operating agreement to define all roles, responsibilities, and profit-sharing arrangements.
Creating a multi-member LLC can be beneficial since you can pool resources and expertise with others, while everyone enjoys liability protection. You can also attract multiple investors with different stakes.
However, the downside is that it’s a more complex management structure. You’ll definitely need clear agreements to avoid disputes.
Ultimately, this is the best LLC structure for real estate investment if you’re after partnerships or group investments. This is especially true if members have complementary skills; for example, one might handle finances while another oversees property management.
Series LLC
A series LLC is quite a unique structure for LLC property ownership. First, you start off with a parent LLC, and then there are separate “series” underneath it. Each series is its own entity, which provides distinct liability protection for different assets.
What this means is that you can segregate liabilities between properties or projects. Simultaneously, you can simplify management by consolidating administration under one umbrella. In addition, you’ll benefit from cost-savings since you might only need one filing for multiple series.
While all this might sound nice, the biggest caveat is that series LLCs aren’t recognized in all states, which limits its application. And even if you’re able to form series LLCs, there are complex tax filings if the series aren’t treated uniformly.
If you’re looking for an LLC structure for multiple rental properties, then this is certainly one to consider. It’s also good for investors with diverse portfolios who want to minimize liability risks.
Holding Company LLC
A holding company LLC is similar to a series LLC in that it owns other LLCs. These LLCs under the holding company each hold individual properties or business activities. Plus, the holding company acts as a centralized management entity for multiple investments.
The main advantage is that there’s a high level of assets protection since liabilities are contained within the subsidiary LLCs. This allows you to strategically separate your properties to minimize risk exposure. In addition, since reporting’s consolidated at the holding company level, you’ll have simplified tax and financial oversight.
Before you create a holding company LLC though, do know that there’s a much higher administrative burden since there are multiple entities. You’re likely to face additional costs for maintaining each LLC.
Those who already have large portfolios are better suited for holding company LLCs. Or if you have a long-term vision of acquiring diverse properties, this may be ideal for you too.
Joint Venture LLC
A joint venture LLC is a partnership formed for a specific project or deal. Once it’s complete, the joint venture is usually dissolved.
Like a multi-member LLC, a joint venture LLC lets you combine resources and expertise. But the key difference is that you get short-term collaboration without long-term commitments. As long as you outline clear terms in the operating agreement, then you’re sure to get smooth execution of the project.
A joint venture LLC is limited to the scope of the venture though, so it might not work for ongoing operations. Plus, the success of the project heavily depends on well-defined agreements to avoid conflicts.
Because of all the above, a joint venture LLC is ideal for developers or investors partnering on a single real estate project. For instance, if you’re flipping a property or building a complex, then choosing this structure can be beneficial.
Protect Each Property With Separate LLCs
Many real estate developers take extra precautions to safeguard their investments by creating a separate LLC for each property or development. This strategy isolates liabilities, meaning that if one property faces legal challenges or financial difficulties, the impact is limited to that specific LLC. The rest of your portfolio remains protected.
This approach not only minimizes risk but also simplifies financial management by keeping property-specific income, expenses, and liabilities separate.
Choose Your Ideal Real Estate LLC Structure
With this information, you can decide on a real estate LLC structure that works for you. Just remember that LLC regulations vary by state, which means that the costs (both initial setup and annual maintenance fees) will differ as well.
Whichever decision you make, you should work with a tax advisor to ensure you’re leveraging deductions. They’ll also make sure that you’re complying with both state and federal laws.
Sign up with Business Anywhere now to utilize our free business registration service. We also offer affordable registered agent services after your free first year is over.
