Why do The Stealthy Rich Use an LLC To Hold Real Estate?

What Is An LLC?

A limited liability company or LLC is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership with the limited liability of a corporation.

What the heck does that even mean?

The Stealthy Rich will break it down for you.

Three Reasons The Stealthy Rich Love a Good LLC

1. Anonymity
2. Asset Protection
3. Flexibility

Anonymity

As all our properties are owned inside an LLC, it’s more difficult for people to discover who we are as the real owners. Check out House #27 if you want to see how we buy these houses. People just can’t just look you up the addresses on the tax records or look up the deeds on the county website as everything is in the name of the LLC in those sources. Now if they are smart, they can look up the LLC in the state database and find who registered the LLC, but that’s not always 100% accurate or complete. That’s because you can add/remove members to the LLC with a legal operating agreement, so even the entire membership can be confidential. Plus if you are a landlord, you can use the LLC name to protect your name from tenants. We have found that anonymity from our tenants is critical.

Also, it’s handy to keep nosy neighbors and friends/family from knowing what you own or how much you own.

Asset Protection

Everybody says that the best reason to have an LLC is Asset Protection. The Stealthy Rich don’t necessarily agree, and here’s why.

While it’s true, an LLC can protect your personal assets if the LLC gets sued. This means that if somebody sues you because they got hurt in one of your properties, then your personal assets outside the LLC can’t be taken. This is great news. However, that doesn’t stop people from coming after the assets in your LLC. In our case, most of our assets are in the LLC anyway! Therefore, your best bet for real LLC asset protection is to be adequately insured with plenty of general liability (GL) insurance in case somebody gets litigious. We will discuss this more in a future post.

Flexibility

Flexibility is perhaps our favorite benefit of an LLC. Ulitmate flexibility. What do we mean by that? Two things.

Divided Ownership

People always ask us, “How do you divvy up money and decide how to split houses if you have partners? Doesn’t it get messy?” Where do you store the money? How do you pay taxes?

Easy. You put all your assets in an LLC: properties, bank accounts, etc.

In an LLC, you can decide precisely the ownership percentage each partner has. In our situation, it’s 50/50. This percentage breakdown means each asset and each dollar of cash flow is split in half, which leads us to our next flexible benefit of an LLC.

Pass-through taxation

An LLC is a pass-through entity which means the LLC itself doesn’t pay any taxes. Instead, we get a schedule K-1 from our CPA each March. This schedule is an accounting of all the LLC’s income, expenses, depreciation, etc. which all boils down to a pretty number which accounts for our percentage of profit/loss in the LLC based on our ownership percentage. We then plug that number into our personal tax returns each year either as income or a loss depending if that number is positive or negative.

How To Set Up A Real Estate LLC In 6 EASY Steps (These are Texas Specific Steps)

Note: You can set up an LLC in any state regardless where you live or where your properties, there are some different fees depending on the state, and some states charge a yearly fee/tax to maintain one.

1. Choose a Name for Your LLC

Under Texas law, an LLC name must contain the words the words “Limited Liability Company” or “Limited Company,” or the abbreviations “L.L.C.,” “LLC,” “LC,” or “L.C.” “Limited” may be abbreviated as “Ltd.” or “LTD” and “Company” as “Co.”

Your LLC’s name must be different enough from the names of other business names already in the database with Texas. You can check if your desired name is available at the Texas Secretary of State website.

You may reserve a name for 120 days by filing an Application for Reservation or Renewal of Reservation of an Entity Name (Form 501) with the Secretary of State. The reservation may be filed online through the Texas Secretary of State website, or sent by mail. The filing fee is $40.

2. Chose a Registered Agent

Every Texas LLC must have an agent for service of process in the state. This is an individual or business entity that agrees to accept legal papers on the LLC’s behalf if it is sued. The registered agent may be a Texas resident or a business entity authorized to do business in Texas. The registered agent must have a physical street address in Texas. The LLC may not be its own registered agent. You can find information on Texas commercial registered agents here.

3. File a Certificate of Formation

A Texas LLC is created by filing a Certificate of Formation for a Limited Liability Company (Form 205) with the Secretary of State. The certificate must include:

• the LLC’s name, including the chosen LLC designation
• the name and address of the LLC’s registered agent
• whether the LLC will be member-managed or manager-managed
• if member-managed, the name and address of each initial member
• if a manager-managed, the name and address of each initial manager
• general-purpose clause (as provided)
• the name and address of the LLC’s organizer
• the effective date of the certificate, and
• signature of the organizer.

The certificate may be filed online through the Texas Secretary of State website, or by mail. The filing fee is $300.

4. Prepare an Operating Agreement

An LLC operating agreement is not required in Texas but is highly recommended. This is an internal document that establishes how your LLC will be run (See Flexibility section above). It is not filed with the state. It sets out the rights and responsibilities of the members and managers, including how the LLC will be managed. It can help preserve your limited liability by showing that your LLC is indeed a separate business entity. In the absence of an operating agreement, state LLC law will govern how your LLC operates.

• Members’ percentage interests in the LLC
• Members’ rights and responsibilities
• Members’ voting powers
• How profits and losses will be allocated
• Rules for holding meetings and taking votes, and
• Buyout, or buy-sell, provisions, which determine what happens when a member wants to sell his or her interest, dies or becomes disabled.

5. Comply With Other Tax and Regulatory Requirements

Additional tax and regulatory requirements may apply to your LLC. These may include:

EIN: If your LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN), even if it has no employees. If you form a one-member LLC, you must obtain an EIN for it only if it will have employees or you elect to have it taxed as a corporation instead of a sole proprietorship (disregarded entity). You may obtain an EIN by completing an online EIN application on the IRS website. There is no filing fee.

6. Annual Reports

Unlike most states, Texas does not require LLCs to file annual reports with the Secretary of State. However, LLCs must file annual franchise tax reports. The details for computing the tax can be complicated. Check the Comptroller of Public Accounts website for more information.

So get out there and find out how to start an LLC in your state of choice if you want to start a business. It’s going to be awesome. Use an LLC to buy property the Stealthy Rich Way.