A limited liability corporation, abbreviated as LLC, is one type of corporate structure. This type of structure allows the members of the company to not be held personally liable for liabilities or debts that the company creates.
LLCs in Real Estate Investing
Oftentimes, limited liability corporations are setup when investing in real estate for tax and risk purposes. Additionally, LLCs are setup when investing in real estate for the following reasons:
- First of all, LLCs provide protection to the investors, as well as exempting them from certain taxes. Most importantly though is the tax exemptions, as this allows investors to easily benefit from debt deprecation deductions.
- Secondly, this type of entity allows the members of the LLC to comprise nearly every aspect of the management and financial structures of the entity. Even more so, an individual, corporation or other partnership can become members of an LLC. Therefore, easily allowing real estate investments to meet their fulfillment requirements by individual investors or institutions.
- Another reason many real estate investments structure themselves as an LLC is due to the removal liability. This means members and managers cannot be held responsible for the debts of the entity simply because they are a member of the LLC. Of course, the LLC does not protect any member or manager from their own misconduct.
- Lastly, the tax exemptions LLCs receive is another reason many real estate investments structure themselves this way. Since under federal income tax rules LLCs are not subject to federal or state income tax, disbursements won’t necessarily make the income tax liability of the LLC rise. Due to this, each member reports the income on their personal tax returns instead.