What are the Disadvantages of an LLC?

A limited liability company (LLC) is a corporate structure that can give you liability protection and shelter you from financial risk in case your business incurs debt or a lawsuit is filed against it. There are numerous types of LLCs, as many businesses can be structured in this way. The one we’ll be discussing in more detail in this article is a real estate LLC - what it is, how you can set up one, and what the key benefits and disadvantages of this business structure are. What Does LLC Mean in Real Estate?  Forming a Real Estate LLC An LLC can be established for a particular real estate asset or own multiple real estate properties. What’s important is that your LLC, being a separate legal entity, can purchase, own, or manage real estate. That’s thanks to the fact it has its own bank account, it files taxes on its own, and it acts as an independent real estate company. Several factors should be taken into consideration if you are thinking of setting up an LLC for your real estate business. We’ll now go over each so you can decide if this is the right option for you. Advantages of an LLC for Rental Property Here are some of the main reasons in favor of forming an LLC if you run a real estate business. Asset and Liability Protection First and foremost, you should make sure that your personal and business assets are separated. This is why most investors choose to form separate LLCs for each of their properties. By separating your properties, you are protecting them in case of bankruptcy or a lawsuit. Should one of your LLCs fall into debt, the creditors can only come after its assets, while your other real estate LLCs or your personal assets will remain out of reach. Tax Benefits One of the major advantages of an LLC structure certainly is the tax benefits. The Internal Revenue Service doesn’t tax LLCs directly, and there is a certain amount of flexibility in the process. And since single-member LLCs are eligible for pass-through income taxation, LLC members can tax any business income under their own personal tax rate. However, when it comes to employment tax, single-member LLCs are still counted as separate entities. If you are starting an LLC for real estate, you should know that the IRS can treat your LLC in three different ways, depending on the option you choose when filing Form 8832: Corporation - The IRS considers your business as an individual taxpayer. If classified this way, your LLC would need to report all of its income and deductions and pay the appropriate taxes. Partnership - All LLCs with at least two members are automatically classified as partnerships unless you specifically choose to be treated as a corporation. This setup of your real estate LLC would make you responsible for putting together the annual partnership tax returns. Disregarded entity - All single-member LLCs are eligible to be classified as disregarded entities, unless you specifically choose to be treated as a corporation. In this case, all the taxes owed by your LLC would be paid as part of your income tax return. Prior to deciding on the option you want to go with, note that you won’t be able to alter that decision for five years. Reliability and Ease of Transferring Interests Creating an LLC for real estate will give more professional appeal to your business, especially if you are trying to lease a particular property. A business or an individual will probably be far more confident renting real estate from an LLC than from an individual. And if you are considering selling your LLC, you’ll be happy to know that transferring membership interests is a relatively straightforward process. The LLC will remain the owner of its real estate assets; the only thing that will change is the ownership, which makes it easier to complete the transfer and preserve the business’s continuity. How To Set Up a Real Estate LLC A few steps need to be completed to set up an LLC for your real estate property. You can do it on your own by following our list of steps provided below or get help from an LLC service agency. Step 1: Research your state’s regulations Most investors decide to form their LLC in the same state they are doing business or where the property is physically located. This is generally the best course of action since you’ll have to pay a tax return in that state; however, some states do have more flexible tax policies. Either way, we advise you to get thoroughly acquainted with the laws of the state where you plan to form your LLC for real estate. If you are not sure where to begin, you can get help from a professional legal service.  Step 2: Choose a business name  When picking out a name for your LLC, you primarily need to make sure it doesn’t already exist. Of course, you should also focus on coming up with a name that has the potential to  attract new clients. So, make a list of a few catchy names and check their availability. Along with this, you’ll need to find a registered agent to sign a consent to accept any legal paperwork on behalf of your LLC. Step 3: File the Articles of Organization If you wish to create an LLC for rental property, you are obliged to file the Articles of Organization. It’s a document that states the company name, start date, address, business owners, and it contains a description of the business itself. This is the single most important step, so make sure to double-check you’ve included all the required info before you submit the document. There is also a filing fee you’ll need to pay. Its cost varies from state to state and can be as low as $50 or as high as $500. Step 4: Compose an operating agreement This agreement should be a part of your business plan, even if it’s not obligatory in your state. Real estate LLC operating agreement is a handy tool which will help you specify how decisions will be made inside the company and how you’ll distribute tasks among members. The agreement’s main purpose is to protect the business owners and predict scenarios that can potentially damage the business and its structure. Step 5: Step Publish your intent to file This step is only required in three states: Arizona, Nebraska, and New York, and it practically means that, if you are starting an LLC in one of them, you need to publish an ad in the local newspapers saying that you wish to create an LLC.  Step 5: Get the necessary licenses and permits When registering a real estate LLC, you usually need to gather various permits and licenses. The list varies by state, but it usually consists of a general business license, professional license, and a sales tax permit. Along with that, you should apply for a tax identification number with the IRS. You can find all of this information on your area’s Secretary of State website. Downsides of Starting an LLC in Real Estate While there are many benefits to structuring your real estate business as an LLC, there are some disadvantages of an LLC for rental property. So, before deciding whether to take a step in that direction, we advise you to consider the following cons: Franchise Tax Certain states charge a franchise tax on LLCs treated as corporations by the IRS. These taxes vary depending on the state; therefore, it’s advisable to check this with your local authorities. No Board of Directors The fact that an LLC doesn’t have a board of directors as a standard corporation does might impact your business. If your rental company wants to form a joint partnership with another corporation, they might see it as an issue. FICA Tax Also called a self-employment tax, this is something you should take into consideration if you wish to set up a real estate LLC. All members of an LLC are obliged to pay the self-employment tax. The rate is usually about 15% of the taxpayer’s overall income. Final Thoughts Nowadays, most real estate investors structure their businesses as LLCs. The most significant advantage of this business structure is that it offers protection from liability claims in cases such as construction accidents or issues with tenants. Tax benefits and the fact that LLCs can be filed with the IRS as disregarded entities are also reasons in favor of starting a real estate investment LLC, but before you go ahead, check your local LLC regulations.

So, you operate a small business in these unprecedented times of pandemics. And it’s risky, of course. Would it be less risky if you opened another limited liability company? Can an LLC own another LLC? Is it even legal? In a nutshell: Yes. Not only that it’s possible and legal, but it’s an excellent idea, especially if you own several business lines. If you have multiple business ventures, and these come with various levels of risk, forming a subsidiary LLC for each of the ventures will minimize risk: If one of them fails, the assets of the others will be protected.But let’s start with the basics: What is a subsidiary? What do the terms parent LLC and subsidiary LLCs even mean? If you’re not familiar with these expressions, let alone with regulations and requirements, worry not; We’ll walk you through all the steps and explain all the pros and cons of this business umbrella structure. Also, we advise you to take a look at this list of LLC service choices.Types of LLCsA limited liability company or an LLC is a business entity that offers flexibility and simplicity. It can be owned by individuals, corporations, other LLCs, or foreign entities. The number of owners (called LLC members) is not limited, and most states allow single-member LLCs. But, how many LLCs can you have? And what are the benefits of having more than one?The number of LLCs one person can register is not limited. Similarly, an LLC can own multiple businesses, run as separate LLCs, where the holding LLC is the master entity.There are several types of LLC companies you can have: A single-member LLC (Sole Proprietorship) - has a single owner; A domestic LLC - operates in the country in which it was opened; A foreign LLC - does business outside of the country of origin; A professional LLC - for licensed professionals (usually doctors and lawyers) A series LLC - designates rights, obligations, and debts to smaller cells called series.How Can an LLC Own Another LLC?If you wish to register an LLC, you can do it on your own, or choose a cost-effective legal service to help you with the registration process. Essentially, there are three ways you can structure your business. First of all, you can create individual companies for as many businesses as you wish, as there is no limit. Pick a suitable name that hasn’t been registered, choose a registered agent, and file the Articles of Organization. Each business will count as a stand-alone entity. This option can be an excellent choice for real estate businesses. Secondly, you can create multiple DBAs under one LLC. In this case, the original LLC will not count as the LLC parent company. DBA stands for Doing Business As. It’s a kind of pseudonym for your business. Companies usually register additional business names because they want to operate under a shorter and more memorable name. Note that, by registering a DBA, you don’t create a new legal entity. If any DBA under your LLC is sued, the LLC is liable.The third option is to form an LLC holding company by putting multiple businesses under one LLC; Creating a subsidiary of an LLC, or multiple ones, instead of opening new LLCs is a good idea because each individual LLC, including the holding LLC, will be protected from the others’ liabilities. If you transfer your assets to the holding LLC, they will be out of reach of the subsidiary LLC’s creditors, while a lease agreement can be signed so that the subsidiary LLC can still use them.Once you go through all the possibilities and make a plan, we would advise you to find a bank to help your small business get on track.  Benefits of an LLC Owning Another LLCThe most significant advantage of this business structure would be minimizing the potential financial risk if one of your companies stumbles upon some bumps in the road. Once your subsidiaries are owned by a business entity that protects them, if any of them loses their value, it won’t jeopardize the master entity. And if one of the companies gets sued, others are safe from liability, which is a significant benefit.On top of this, opting for an umbrella structure benefits your reputation, too. Your LLC owned by another LLC is more likely to get a loan from a bank, especially if it’s a startup. Being a part of a larger company gives you access to better rates and terms for bank loans. By the way, if you have a bad credit score but want to start a small or medium-sized business, check this list of banks that offer bad credit business loans. Last but not least, each subsidiary has its own management, meaning that the holding company’s managers don’t need to manage them too. In fact, they don’t have to know anything about the subsidiaries’ day-to-day operation.Benefits of an LLC Owning Another LLCAs always, there are downsides to the parent-subsidiary LLC structure as well. Owning multiple small businesses means much more paperwork when launching the LLCs, filing forms, opening and maintaining bank accounts, tax documents, payrolls… It also means higher costs, because you need to pay filing fees for each LLC you open. Besides, creating a holding company and having subsidiaries won’t protect the subsidiaries from liability in case the parent company gets in legal trouble. Creditors might tap into the subsidiaries’ insurance coverage if the judgment exceeds the parent company’s insurance.  To sum it all up: An LLC owning another LLC represents a legal way of structuring your business but you should always consider all the possible benefits and disadvantages before restructuring your company in this way.

Your business name plays a monumental role in how your company is perceived. It’s the first thing your clients interact with, and getting it right is essential for branding success. As such, there are a number of good reasons that can prompt you to change your LLC name.  Sometimes a business name just needs to be modified to become more unique. Other times, the departure of a business partner or changes in the branding strategy may require adjustments. Every business evolves, and if you start experiencing an identity crisis, it’s only logical to consider a business name change. How to change the name of your LLC? Changing a business name can be frustrating, especially if you aren’t familiar with the procedure. For starters, bear in mind that if you have partners, you’ll need their written consent to make any name changes.  Each state has its own rules and regulations when it comes to LLC names. The process of changing your business name can be a little more complicated if your business operates in more than one state. Naturally, changing an LLC name will cost more if you do business in multiple states.  We created a step-by-step guide that thoroughly explains everything you need to know to complete your business name change. Of course, if this is something that you aren’t ready to do on your own yet, there is no shortage of legal services that can help you change your business name. Check available LLC names If you’re trying to figure out how to change your LLC name, the first step involves checking whether your new name is available in the state where your business operates. Business filing agencies allow you to conduct a search on their websites for free, but you can get the same information from the secretary of the state’s website.  It’s important to complete this step correctly and select a name that the state will approve. You cannot choose names that are similar to other LLCs. It’s also important to remember that your requested name can still be claimed by third parties until it’s officially approved and filed with the state. Approve a resolution to change the name of your LLC The next step is to get a written resolution that shows that all owners and members of your LLC agree with the name change. Each business should have an LLC operating agreement, a document that outlines how important decisions are made in the company. In some companies that process only involves two people, while others require all members to vote. Either way, having a proper operating agreement can speed up the entire process. This is also one of the main downsides of an LLC, as it requires strict rules on who makes decisions. In case you don’t have an operating agreement, you can draw up an informal one with other LLC members. Just make sure that you meet the LLC name requirements that vary from one state to another. Amend the name in your articles of organization After you get written approval to change your business name, you’ll need to amend your articles of organization. This is the longest step of the entire process, and you usually need to wait up to 30 days for the state to make the changes. It’s also referred to as articles of amendment or certificate of change. Each state has its own forms on how to change the name of an LLC.  You can easily download the forms on your computer and file them. The filing fees depend on your state of incorporation. Change your business name in your operating agreement The state will inform you about your approved name change by mail. Your registered agent can receive this document on your behalf and inform you when the mail arrives. You’ll then need to make updates to your operating agreement to reflect the name change. IRS LLC name change One of the most important things you need to do after you change your business name is inform the IRS about it. It’s a standard procedure requiring you to file a proper form. There are several options for paying taxes depending on whether you’re a single member, co-owner, or pay taxes as a corporation. You can read our guide on how to pay taxes with an LLC and find out everything you need to know. Inform Licensing agencies If you operate a business that requires state or federal licenses, you’ll need to inform the relevant agencies about the name change. Some of these agencies may require you to produce a certified document from the state authorizing the name change.   Change the name of an LLC on your business accounts Once the name change is finalized, you’ll need to update all your accounts, contracts, invoices, and leases. You’ll also need to contact your bank and order new credit cards and checks if your company uses them.  The business name must be updated on all your official documents. For instance, you need to change it on all the contracts with your clients and suppliers. Update the name on all other documents The formal part of the LLC name change is completed once you inform your bank and vendors, but then you need to change the name everywhere else. First off, make sure that your website is updated with the latest information. Perhaps you’ll need to change your email address if it contains the old name. You’ll also need to print new business cards, brochures, and any other promotional material you show to your clients.  How can you change the name of your LLC without changing the entity’s legal name? If changing the entity’s legal name seems too complicated or isn’t necessarily the right fit for your business, you can always choose the easier option of filing for a DBA or “doing business as.” This allows you to run your business under any name you want while keeping your legal name unchanged. A DBA is also known as a fictitious name. In some states, business owners are required to have a fictitious name so the state can protect consumers from illegal businesses. Aside from that, a DBA is commonly used for marketing purposes, allowing LLC owners to use another name for promoting their business. How much does it cost to change the LLC name? The costs of changing your business name vary from state to state. Most charge a filing fee to process your application, which typically ranges between $20 and $150. The costs can be higher for those who have LLCs that operate in several states. Bottom line It’s perfectly legal to change the name of your business, and if you follow our short guide, the entire process is straightforward and entirely manageable. But sometimes, changing the name of an LLC is not the best option for business owners. If you aren’t absolutely sure that a name change is necessary, you can file for a DBA instead. This will allow you to operate under a fictitious name while keeping your original LLC name. The DBA filing process generally involves nothing more than a small fee and a simple form.