Forming a Real Estate LLC: Everything You Need to Know – MarketWatch

The steps required to officially create your LLC are nearly identical in most states — but some require an additional step or two. If you want more detailed information on how to start an LLC in your state, see our state-specific guides at the end of this article.

Step 1: Name Your Real Estate LLC

If you’re starting an LLC to hold property, you’ll want to choose a formal name (last name or initials of the member(s)) that is completely unique from any other name in existence in your state. You’ll also need to comply with your state’s guidelines for naming a business entity which generally include:

Having the name “limited liability company” or one of its acronyms in your name (LLC or L.L.C.)
Avoiding confusion with a government entity or department (e.g., NSA, IRS or Department of Treasury)
Avoiding restricted words or phrases that imply an official capacity without permission from the state (e.g., University, Bank or Taxation)

Step 2: Choose a Registered Agent

All states require LLCs to have a registered agent on record. This agent is responsible for receiving important state and legal documents on behalf of the LLC. You can choose a member of the LLC to be your agent, or you can hire a registered agent service to do the job for you.

Either way, the agent must be at least 18 years of age. Additionally, the individual or service must reside within the state and be easily accessible in case the LLC needs to be served legal documents.

Step 3: File Your Organization Documents

To officially create your LLC, you’ll need to register your company with the state (usually the secretary of state’s office). To register, you’ll need to file a formation document called the articles of organization or certificate of formation (the name varies across states) and pay a filing fee.

This document houses all your LLC’s contact information as well as details about your LLC that will then be on record with the state. Some common information you’ll need to put in the document includes:

Name of your LLC
Address of your LLC
Purpose of your LLC
Name and address of your Registered agent
Date of formation
Name and address of the individual that’s filing

Step 4: Create an LLC Operating Agreement

While an operating agreement is only required for LLCs in a few states, it’s a best practice to have one in place — especially for a real estate LLC. This agreement is a contract between the members as they relate to one another, and as they relate to the LLC.

This agreement can be as detailed or as broad as the members prefer. Some common clauses in an operating agreement include:

Voting rights
Transfer of ownership procedure
Profit and loss distribution
Accounting and other financial information
Day-to-day operations
Member rights and responsibilities

If one is not required in your state and you choose not to have one in place, your LLC will be governed by the state’s default LLC laws which might not be preferential for your company.

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Law in Action: For example, four friends start an LLC to hold and rent townhomes. One of the four contributes all of the startup funding. The members choose not to put an operating agreement into place but they decide that each member should get an equal share of the profits. The default law in the LLC’s formation state is that profits are distributed proportional to each member’s contribution. If at any time in the life of the LLC, the member who contributed all the startup funding wants to claim all the profits, they can do so under state default law. The other members would have a difficult time in court trying to defend their original decision to split profits equally. An operating agreement putting the decision into a contract would help them win their case.

 

Step 5: Get an Employer Identification Number

An employer identification number (EIN) is essentially a Social Security number for your business. It will be the number you use when filing taxes or applying for loans or opening a bank account. LLCs with more than one member or employees are required to get an EIN. However, even single-member real estate LLCs should consider getting one.

An EIN is provided by the IRS and can be obtained by a free application online. Alternatively, you can pay for an LLC formation service to acquire one on your behalf.