Startup business formation is one of the first tasks of an entrepreneur. For a real estate entrepreneur, a Limited Liability Company (LLC) is a great way to protect your personal property from seizure due to liability claims. It allows you to anonymously own and manage your assets. Before you start your real estate LLC, you need to put these 8 things into consideration:
1. Register in Your State or States
Since the business formation of LLCs depend on local state laws, you need to do your research before forming one. It’s preferable for you to register your real estate LLC in the area where you intend to operate because it makes filing your returns easier. Alternatively, if you plan on investing in different states, you have to register your LLC in each state.
2. Name Selection
You have to pick a name that is not used by any other business operating within the United States to avoid trademark violations. In addition, your name must end with LLC to differentiate it from a corporation. Your company name should also not contain words prohibited by some states, for example, “bank” or “insurance firm”. An important point to remember when choosing a name for your LLC is that you want it to grow with your business. Therefore, don’t select something that limits expansion, like adding a city or state if you hope to expand beyond them in the future.
3. File the Articles of Organization
The Articles of Organization is a business formation document containing the LLC’s name, address, and in some states, it has the list of members. The formation of your LLC becomes official on the day that you file it with the secretary of state. When filing your LLC, you need to designate an agent who will be responsible for handling any legal documents on behalf of the LLC. It can be a member, an attorney or a service company.
4. Operating Agreement
This is perhaps the most important part of setting up your LLC since it creates an operation plan to prevent any future disputes. This agreement is drafted in the presence of all LLC members. The operating contract defines member contributions: the amount, the collection deadline, and fines for late contributions. It also describes how profits and losses will be shared among members. Other information contained in the agreement typically should include the management team, voting rights, indemnification protection for the administrators, restrictions on the transfer of units, and procedures for meetings and dissolution.
5. Employer Identification Number (EIN)
If you plan on hiring people, you need to get an EIN. This registration number allows the federal government to tax your LLC. To get one, just visit the IRS website and register, it only takes a few minutes and you have your EIN.
6. Open an Account for Your LLC
Before you make any real estate investment offers, you need to create a business account for your LLC. The business account should be separate from your personal one to help you keep track of all your transactions for taxation and operation purposes. Some banks might need your LLC’s EIN number and other business formation documents before they permit you to open a business account.
7. Get an LLC Membership Ledger
Obtain an LLC ledger to monitor all the transactions involving members. If there’s a new member, write down his or her details and the amount they contribute. The ledger also contains information about the types of units owned by individual members, the quantity, and the dates when the units were acquired. This document is used to record up-to-date financial information of all members.
8. File Your Annual Reports
Many states require you to file annual reports highlighting important LLC operational decisions made by the management that year. It can include minutes of past meetings and their resolutions. Ensure that your annual report is signed by whoever is in charge of such operations to prove that it is official.
If you have any questions about the business formation process, you can always consult a professional real estate advisor or attorney. Always remember that as an investor, you have to protect your assets from accidents and greedy people. The best way to do it is to form a limited liability company.