Do you own property or have a mortgage in Michigan? If so, you may find it helpful to form a real estate LLC in Michigan. However, before you take this step, you need to find out your lender’s requirements first. You’ll need to know this info before you transfer a title to a new LLC.
So, what’s so special about forming a limited liability company if you’re a real estate investor? The strength of an LLC lies in its ability to safeguard a real estate investor from personal liability.
By forming this type of entity, you separate what you own personally in case of a lawsuit. In turn, then, a real estate LLC in Michigan is considered a distinct legal entity. For example, if your LLC business does not pay its debts or someone sues you, a creditor cannot hold you personally responsible. Therefore, you’re protected from seizures, such as in your home or car.
When an LLC Owner is Still Held Liable
Instead, the LLC is held accountable, so any money in the business is used to pay unsettled debts or obligations. However, it’s still important to remember, you may still be held liable personally if the following applies:
- You directly or personally injure another party
- You personally guarantee a business debt or loan on which your business defaults
- You do not deposit the taxes withheld from an employee’s earnings
- You illegally, recklessly, or fraudulently do something with intent, which causes harm to another party
- You treat the LLC as an extension of your personal business rather than a separate entity
Therefore, when you use a real estate LLC as asset protection, you need to make sure, as a real estate investor, to treat your LLC as a business and leave any personal dealings out of your business affairs. Using this corporate shield is critical to expanding your real estate holdings, especially as you buy and sell Michigan properties.
Real Estate Tax Benefits for LLC Companies
When you set up a real estate LLC in Michigan, you’ll enjoy pass-through taxation. Therefore, you won’t have to pay taxes directly on the business. Instead, you can report your company’s profits or losses on your individual tax return.
Basic Options for Forming an LLC in Michigan
Doing so, in most instances, results in a lower tax rate and prevents double taxation. If you set up an LLC as an investor, you usually have three basic options with respect to taxes.
- Forming a single-member LLC will keep your business from being taxed. As an LLC member, you will be taxed, through your individual tax return.
- If you set up a partnership for your LLC, you may elect to be taxed as a traditional partnership.
- Establishing a corporation LLC causes you to be taxed as a corporation, or as an “S” or traditional “C” corporation.
When you set up your real estate LLC properly, you can save thousands of dollars in taxes annually. For example, if you own rental property, the income you receive qualifies for a 20% deduction on business income. You can subtract this amount from your personal taxes.
You can also discover additional savings with deductions for depreciation, mortgage interest, maintenance, repairs, property taxes, and insurance. Other frequent costs include regular expenses, such as travel and advertising costs.
Building Business Credit
By establishing a Michigan LLC, you can also build credit. Once you form an LLC, you can obtain an Employer Identification Number (EIN). Using the number is a great way to build your credit rating. This enables you to apply for credit lines under the name of your business. In turn, you can double your ability to borrow money for real estate.
An Easy-to-Register Entity
An LLC is an easy entity to register. The Small Business Administration provides four basic rules a business/investor should follow as well as general guidance about other business structures.
1. Select a Business Name
Your business name in Michigan must be different from other LLCs in the state. It cannot include the words like “bank” or “Insurance.”
2. File the Articles of Organization
To validate your LLC, you need to file articles of organization. This document should include your business name, address, and the member names in your LLC. You can access this form through the Michigan Department of Licensing and Regulatory Affairs (LARA) website.
3. Create an Operating Agreement
While you don’t have to create this contract, legal professionals recommend you do so, especially if you operate an LLC with multiple members. The document is essential, as it outlines the regulations and rules for your company’s business. These guidelines include your members’ responsibilities and rights as well as the percentage each member shares in the business. It also includes the allocation of profits and losses.
4. Obtain the Necessary Licenses and Permits
You’ll need to acquire the required business licenses and permits after you register your LLC.
Transferring an LLC in Michigan
You’ll find it relatively simple to sell a Michigan LLC and transfer interests. While the LLC will continue to own prior-owned real estate, a new member gains ownership of the LLC.
An LLC offers liability protection as well as versatile ways to manage a company. While the LLC owns and manages the business, members vote on how to split profits. Both a corporation and LLC offer liability protection. However, a corporation is much more complicated to form and run over time.
Call the Corporation Center for Further Details
The formation of a real estate LLC in Michigan offers many exciting opportunities for a real estate investor. To learn all the details about forming this entity contact the Corporation Center at (800) 580-4870 right away.