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Why Form a California LLC for Real Estate?
As a California real estate investor, it’s important to make sure your personal assets are protected.
Real estate investing in CA carries more risk than a lot of other businesses. For example, slip-and-falls, renovation errors, falling debris, broken stairs, etc. Anything that can put your tenants (or their guests) at risk is a potential threat to you.
If you buy property in your personal name (instead of through your LLC), your personal assets are at risk if you get sued.
A California LLC (Limited Liability Company) is a type of business structure formed by state law. It has the “personal liability protection” of a Corporation and the “pass-through taxation” of a Sole Proprietorship.
Although an LLC is used to run a business, LLCs are also used to hold and manage assets, such as real estate.
Let’s discuss why a California LLC is a good option for real estate investors.
Need to save time? Hire a company to form your LLC:
Northwest ($39 + state fee) or LegalZoom ($149 + state fee)
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Personal Liability Protection
Personal liability protection is the biggest reason why you should form an LLC for real estate investing. Your personal assets are safe if someone sues your LLC.
Picture this: a tenant in the apartment you own slips because of a crack in the bathroom floor. He sues you for compensation for medical bills and lost time from work due to his injury.
Now, if you own the apartment as a Sole Proprietor, you will be held personally liable. The law views you and your business as one and the same. The courts can go after your personal assets (your home, car, bank account, etc.) to pay your business debts.
But, if your California LLC owns the apartment, the courts can’t go after you personally. They can only go after the assets of the LLC.
Remember, the law treats your LLC as a different “person”. Therefore, only your LLC’s assets will be used to pay your LLC’s liabilities. Your personal assets are safe.
Bottomline: real estate investing can be a minefield for lawsuits. If you want to succeed in this field and keep your personal assets safe at the same time, form a California LLC to hold your real estate assets.
Pass-through Taxation
Pass-through taxation is another reason to form a California LLC for real estate investing.
Normally, earnings of legal entities are taxed twice: at the corporate level and the personal level.
For example, a Corporation has to pay taxes first on its earnings. Afterwards, its shareholders also have to pay taxes for their share of the dividends. This is called Double Taxation.
On the other hand, a California LLC is not subject to Double Taxation.
Instead, it is a “pass-through entity”. This means any profits or losses “flow through” to your personal tax return and are listed in a Schedule C.
The LLC does not have to file a separate federal return. Not only does this save you money, but it makes filing taxes easier.
Privacy
Owning investment property in an LLC gives you privacy as your name does not appear in public records.
This is also advantageous for real estate investors who manage their own rental properties and deal with tenants. Sometimes it’s better to tell your tenants that you are just a property manager (instead of them knowing you’re also the owner).
This can make the relationship with the tenant a lot easier. You’ll be on their side instead of the typical “landlord vs. tenant” mentality.
Conclusion
We recommend forming a California LLC for real estate investors. Not only are your personal assets safe if you get sued, you’ll also be paying less taxes than a Corporation.
Forming and maintaining a California LLC is also much easier and more affordable than forming a Corporation. An LLC does not have to elect a board of directors, hold annual meetings, or keep extensive records.
If you want to learn how to form a California LLC, then watch LLC University’s step-by-step videos here.
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
If one person in the LLC property ownership in California wants to sell, and the other doesn’t, what can be done legally?
Hi Christina, you’ll need to look to the Operating Agreement about decisions to sell real estate. Typically, as most 2-Member LLC Operating Agreements are written, both Members would need to agree. As an alternative, if you’re at an impasse, another idea to explore is to “cash out” by selling your LLC Membership Interest (ownership) to your partner. Aka, getting bought out. Or vice versa, depending on which side you’re on.
I am going to buy and rent properties in another state, I heard that despite I have another LLC out state, I should I also create the LLC in California as I am CA resident. Is this true?
Hi Cam, yes; or rather that if you form an LLC in another state, you’ll need to register it as a foreign LLC in California.
I’m going to build a granny house and have my two children run it, rent it, and collect the rents from it. They will pay taxes on the rent they receive, not me. They are part owners of the property where this new granny rental unit will be. Can you help me set up the LLC for them, and what would you charg? This is in California. Jerry Kroth
Hi Jerry, you can form the LLC yourself by following our California LLC instructions or you can hire a filing company (we recommend Northwest Registered Agent). At this time, we don’t offer a filing service ourselves. Hope that helps.