Limited Liability Companies (LLC) are a legal structure that legally separates you from your business. When you operate through an LLC, people will only be able to sue the business structure instead of your person.
A traditional LLC structure handles everything that could incur legal liability (i.e. what people can sue you for), which includes all of the operations (e.g. signing contracts). It is intentionally designed to be what people sue. Because it owns nothing, the plaintiff will receive nothing.
How The Traditional LLC Should And Should Not Be Used For Real Estate Investors
Should Be Used
- To hold an individual asset.
- As a shell company for conducting the operations of a business (i.e. signing contracts).
Should NOT Be Used
- As an entity that holds more than one asset.
Why Set Up A Texas Traditional LLC For Real Estate Investors Instead Of A Nevada, Wyoming Or Delaware LLC?
- No yearly maintenance: Most states will require minutes, meetings and other formalities to ensure your LLC is in good standing. If you neglect even one area, the whole protection fails. In Texas, you don’t have any yearly requirements besides a “No Tax Due” franchise tax filing, which can be completed in five minutes online.
- No State Taxes: Texas does not have income tax for individuals or for companies.
- Great protection: Texas has notoriously strong company protection laws. Even if you make errors that would pierce the corporate veil (e.g. you made errors in your accounting records), Texas law will allow you to fix them and still be protected.
- Cost effective: Texas does not have a yearly fee like the other states.
Pros And Cons To The Traditional LLC For Real Estate Investors
If you invest without an LLC, then anything that goes wrong in your business can harm you personally and anything that goes wrong in your personal life could harm your business. For example, a contract dispute in your business could cripple your personal credit score or a bad car accident over your insurance coverage could allow them to seize your investments. We must separate the risk from one another.
The minimum level of protection required for any real estate investor is forming an LLC.
- Personal Security Guaranteed
The LLC is the legal owner of your property and assets. If something goes wrong with your business or personal life they cannot get to your money.
- Simple, simple, simple
Texas LLCs are easy to manage. All you have to do yearly is pay $39 for a registered agent and file a “No Tax Due” franchise form online (which takes about five minutes).
- Surprisingly Inexpensive
Texas LLCs have a one-time cost and no annual fees.
- All Your Eggs in One Basket
If the LLC owns more than one asset, a lawsuit involving one asset exposes all of the assets of the LLC.
- Expensive Tax Preparation
You can hold one asset in the LLC, but it is not ideal because each LLC will be required to file an annual tax return, pay filing fees and pay a registered agent fee.
- Not a Scalable Solution
Each LLC requires one-time fees as well as yearly registered agent fees and tax filings. The series LLC is a better option because after the filing you can create as many “LLCs” as you want with no additional costs whatsoever.
The Series LLC Beats The Traditional LLC For Real Estate Investors
The traditional LLC is great if you only plan on having one asset or if you are holding a single asset on behalf of a partnership. For every other scenario, the Series LLC is better since it:
- Provides the same protection as holding assets in individual LLCs;
- Offers scalability at no additional costs;
- Streamlines the tax preparation and company filings as if it were a single company.