Investing in real estate can be a smart choice for a balanced investment strategy. You can make that choice even more intelligent by enlisting Harvard Business Services, Inc. to help protect your real estate assets. We can help you form Delaware LLCs to own your properties.
Harvard Business Services, Inc. has specialized in Delaware business formations for more than 30 years. That longevity and leadership give us the expertise to form your business quickly and efficiently, helping to protect your assets and investments. However, we are not a law firm and cannot give legal advice. Please consult an attorney if you need legal advice on this matter. We can, however, explain why investors typically incorporate their real estate as well as point out different strategies to consider when you incorporate your real estate.
Real estate can be a good investment, but one that comes with a host of risks and liabilities. If your properties are titled to a person and not a business entity, you are personally liable for damage or losses that may arise from accidents, injuries, interruptions to business or other events.
If one or several of your properties is involved in a lawsuit, your personal assets—cars, home, bank accounts, other real estate investments and more—are at risk. However, you can protect your assets by placing your properties in business entities to create a barrier between you and your assets. This makes it more difficult for the plaintiff's lawyer to pursue your personal assets in the event of a lawsuit involving your investment property.
Many lawyers agree the smart way to approach real estate asset protection is to form a Delaware LLC and purchase your real estate in the company's name. By using this strategy, your real estate is the property of your company—not you, personally.
Typically, real estate investors choose to form an LLC rather than a corporation due to the tax benefits. Please consult your accountant for more information.
If you own one real estate investment...
If you own one piece of real estate as an investment, often the strategy is to form a Delaware LLC and purchase your property under that LLC's name. This protects you on two levels: your personal assets are legally separated from your property in the event of a lawsuit aimed against your property, and your property is separated from your personal assets in the event of a lawsuit against you personally.
If you own multiple real estate investments...
Some real estate investors who own multiple properties place ownership of all of their properties under one LLC. While this is preferable to a sole proprietorship, it puts all of your real estate at risk in the event of a legal issue involving one of your properties.
If you own multiple properties, you may wish to consider a slightly different approach. A number of real estate investors have found success by utilizing a multiple-entity strategy, such as the one illustrated below:
This strategy involves forming multiple Delaware LLCs—one for each piece of real estate. (LLCs are used because they are pass-through entities with strong liability protection.) Each property is then purchased under one LLC's name, so that each LLC owns one property. Consequently, if one property is involved in a lawsuit, the other properties are out of reach and can continue to produce revenue.
Another strategy that can be used is forming a Delaware series LLC. A series LLC is composed of an individual series of membership interests. Each series is treated as a separate entity (the debts, liabilities and expenses of one cannot be enforced against another series of the LLC, according to Delaware law), and the series LLC pays one annual $300 Franchise Tax to the state of Delaware. The illustration below demonstrates how a series LLC can help provide real estate asset protection:
The predominant entity is a series LLC. The series LLC offers you tax advantages and separates your real estate investments from your personal assets, but each property is titled in the name of a separate series.
Please be advised that while there are several benefits to forming a Delaware series LLC, there are a few potential drawbacks. The first is that the legal separation of the assets and liabilities of each series is tested only in the Delaware courts of law. Banks are also largely unfamiliar with the structure, and can have difficulty understanding that each series can open a bank account. While Delaware series LLCs pay one annual $300 Franchise Tax to the state of Delaware, the U.S. federal tax treatment for individual series is uncertain. However, the IRS and Treasury Department have proposed regulations that could clarify the situation. Lastly, many attorneys and tax professionals are not familiar with this structure.
These are only two of the strategies you can use to protect your real estate investments and personal assets. It would be wise to first consult with your lawyer and accountant and then rely on Harvard Business Services, Inc. to handle the details of filing and maintaining your company.
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Since 1981, Harvard Business Services, Inc. has helped form 136,275 Delaware corporations and LLCs for people all over the world.
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