Form a Maryland LLC for Real Estate Investment
Maryland Business Lawyer for Forming LLC
If you’re buying real estate for investment purposes, it’s important to consider the potential liability that your property could cause. While you likely will worry about paying the mortgage and for repairs, don’t think that’s the extent of your possible liability. If you don’t protect your assets it could lead to a personal injury attorney turning your retirement investment into a nightmare.
Using a Maryland business attorney with experience for forming an LLC to assist you can ensure that you will structure your entity correctly, consider taxes, estate planning, and those many other factors that can affect the way the LLC should be formed.
Separate liability from you with an LLC
To reduce your potential liabilities, it’s best to have a separate entity manage and hold your properties. You may consider the property to be separate from your personal assets, but its not truly separate, unless you create that separation legally. Without the legal separation and limited liability an LLC provides, an attorney can go after your personal assets, not just the property itself.
Costs of moving real estate into an LLC
You will obviously need to pay for the LLC to be formed. Also, the LLC owning the property will be more effective at limiting your liability, rather than just managing the property.
If you already own the property in your name, there will be costs associated with transferring the property to the LLC. You will need to have a new deed filed showing you transferred the property to the LLC.
Your lenders may also need to approve the transfer. Despite the costs, you will eliminate much of the potential liability of owning an investment property and will allow you to sleep better at night.
Having multiple LLCs for your real estate holdings
You can see the LLC as a container both assets and liabilities. All property you put into the LLC will be at risk for liabilities of that LLC. For example, if your LLC owns Property A and Property B and someone sues the LLC for something that happened at Property A, then Property B would not be shielded from that liability.
The way around this is that people often form more than one LLC. In the example above, if LLC A owned Property A and LLC B owned Property B, then a liability that was created by Property A would not affect LLC B or Property B.
It’s important to consider multiple entities if you own a valuable or risky property. You may own one property with a lot of equity and another where its location or use make it more likely to attract lawsuits. You would want to put those properties into separate entities.
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Should you use the same LLC for multiple properties?
If you are someone who regularly buys and resells properties, then you may wish to create new entities. Liability from a past project or former property can linger for years and could affect your the current real property that you hold.
What are the limitations of an LLC for real estate?
An LLC cannot protect a property from the liabilities that property creates. So, if someone gets hurt at your apartment building, your equity in that building can still be at risk. The LLC can, however, meet your bigger concern that those legal claims and liabilities will not affect your personal assets, including your home and your future income.
How do taxes work for an LLC investing in real estate?
Most people investing in real estate will use an LLC, a limited liability company, because of the tax benefits. Unlike other entity types, the IRS considers the LLC with a single member to be disregarded for taxes. This is a significant benefit of an LLC that simplifies your taxes.
The IRS will not require you to file a separate return for a disregarded entity. You report the property’s income and losses on your own tax return, just like you would if you owned the property directly.
If you have more than one member of your LLC, then the IRS will consider it a partnership. You can elect to have it taxed as an S Corporation or a C Corporation, but most will choose to have an LLC with investments in real estate remain a partnership.
Using your LLC properly to prevent liability
We can consider setting up your LLC and moving the property to it as the first step. You must use it properly to limit liability. For instance, if you sign a contract in your name, then you can obviously be liable for it, even if the other party knew you had an LLC.
But, to keep the LLC effective at limiting liability, you will want to have all the business of that property conducted by the LLC, not in your name. It’s easy to do, but you must be a little thoughtful when you sign contracts, write checks, etc.
Some examples of things you will want to do through the LLC, rather than in your name include:
- The checking account
- Tenant leases
- Contractor agreements
- Utility bills
If a judge saw you had an LLC in name only and actually operated the business largely in your own name, then you could still be considered personally liable. The legal term for this is called “piercing the veil.” While rare, it could have devastating consequences for the LLC’s owner.
Lead properties and liability with an LLC
People investing in real estate should always be concerned about lead paint. Those who invest in Baltimore City properties should be careful because a city statute can hold anyone in “control” of the entity responsible for lead paint.
Therefore, as an owner of an LLC, you could likely be considered having control of it and sued personally. If you own or have owned lead properties in Baltimore City, then you would want to discuss whether asset protection steps should be taken with your attorney. If you wait until they sue you, then it’s likely too late for many options.
Why do I need an LLC if I have liability insurance?
While liability insurance can provide significant protection, you cannot assume a jury will limit its verdict to the amount covered by your liability insurance. You also can’t assume your insurance will even cover the injury.
The only way to truly be sure the liability from an investment property is limited will be to form an LLC or other entity with limited liability protections.
Holding or managing a property in your own name creates many opportunities to be personally sued. The only way to truly limit your potential personal liability is to form an entity with limited liability protection and for most that choice will be an LLC.
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Jeff was a great attorney to work with on the sale of our business. When problems popped up for the buyer to close, his manner kept everyone calm, both us and the buyer, and he came up with great solutions. Jeff's experience definitely shows, and we'll be happy to work with him again. - Elizabeth B.
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