The decision to form an LLC for your real estate business is a smart move, but it is not as easy as it seems. 

Starting an LLC for your real estate business requires extensive research and evaluation of various factors to determine the best state for your business.

This guide will provide you with some crucial factors and points that you have to consider and also suggest you the three best states for forming an LLC for your real estate business.

Which are the Best States to Form an LLC for Real Estate

What are the Benefits of Forming an LLC for Real Estate?

LLCs are relatively new in the United States, but they are becoming the most famous structure among small businesses due to their numerous advantages.

Do you wonder how an LLC can benefit your real estate business if you contemplate forming one? 

Here are some benefits of forming an LLC for real estate businesses that will definitely boost your confidence.

Recommended4 Tax Advantages of LLCs for Small Businesses

Easy to Start and Maintain

Comparatively to other business structures, such as C corporations and S corporations, a limited liability company is much easier to set up and operate. 

In addition, it is one of the cheapest forms of business to start in the United States.

Limited Liability

One of the main benefits of forming an LLC is Limited Liability. 

This means LLCs protect an owner’s personal assets, including homes, cars, bank accounts, investments, and more If the company goes into debt.

Simple Ownership Transferring  

Unlike other business structures, it is relatively easy to transfer ownership of an LLC. 

So in the future, if you decide to sell your real estate business, the process will be more straightforward than it would be for other business structures.

Which factors to Consider When Forming an LLC for Real Estate 

When deciding which state to form an LLC for your real estate business, you should consider a few key factors, which are:

State Taxes and Other Fees

One of the most essential points to consider when determining a state to form an LLC for your real estate business is the state’s taxes and fees.

Many states have little to no income tax, while others tax a large percentage of individuals’ income. Minnesota, for example, had an income tax rate of over 9.8%. However, its neighboring state, South Dakota, did not.

There are also some states that charge hundreds of dollars to file an LLC, while others charge nothing at all. So when choosing a state, you’ll need to take their LLC taxes and fees into account.

Series LLC Availability

One of the main factors you have to consider when choosing a state to form an LLC for your real estate business is the availability of Series LLC.

A Series LLC is an LLC structure that is divided into several series. Each series is treated as a separate legal entity and has its own assets, members, and liability limitations. That means that if one series is issued, the others aren’t affected.

Businesses engaged in real estate often benefit from a Series LLC because you can separate your investments into different businesses and reduce the risk of one property affecting all of your other properties.

Real Estate Market

Taxes aren’t the only key factor for determining the state of a real estate market. There are some other factors that can determine a market’s condition. Some states like Alabama and Nevada have relatively lower property taxes, enabling their investment properties to generate high net cash flow.

3 Best States to Form an LLC for Real Estate 

Which is the best state for forming an LLC for your real estate business since you now know the most important factors to consider?

In general, the following three states are the best for investing and setting up an LLC, but the answer will vary depending on what you’re looking to invest in and what kind of LLC you’re looking to form. 

Wyoming

  1. Wyoming state has no state income tax.
  2. It costs just $100 to file and you’ll only be charged $60 per annual report.
  3. Wyoming doesn’t charge extra for non-residents to form an LLC, so whether you live in Turkey or Texas.
  4. Wyoming also allows you to form Series LLC.
  5. According to AirDNA, rental data analytics provider, Wyoming has an overall rental demand score of 93/100. 

Texas 

  1. Texas is one of nine states that doesn’t have an income tax.
  2. It costs $300 to form an LLC in Texas, but there is no annual fee for most LLC owners. 
  3. Although Texas LLCs have to pay franchise tax, the rate is low — as of 2022, it’s just 0.75 percent for Wholesale businesses like real estate businesses.
  4. Houston, the most populous city in Texas, has an overall rental demand score of 69 out of 100, according to AirDNA, a provider of rental data analytics.
  5. Texas is one of fourteen states that allow you to form Series LLC.

Nevada

  1. You don’t pay any income tax in Nevada unless you earn more than $4 million in gross revenue.
  2. It also costs only $75 to form an LLC in the Nevada State.
  3. Nevada also allows you to form a Series LLC.
  4. The overall rental demand in Las Vegas, Nevada, is 79 out of 100 according to AirDNA, a provider of rental data analytics.

How to Form an LLC for Real Estate 

There are two ways to form an LLC for Real Estate: Do it yourself or get a professional formation service to do it for you.

To form an LLC yourself, you have to follow these steps:

  1. Pick a Name for your LLC 
  2. Appoint a registered agent
  3. File your Article of Organization (Certificate of Formation)
  4. Decide on member vs manager management
  5. Draft your Operating Agreement
  6. Apply for Business Tax ID

Pick a Name for your LLC 

The first step to forming an LLC is to select a name for your LLC. Generally, you will need to follow this naming instruction:

  • You must include the word limited liability company or LLC in your company name.
  • You have to avoid restricted words such as a bank, trust, Law, Attorney, etc.
  • You should not include such words in your company name that confuse your LLC with a government agency.
  • I also recommend registering your LLC name’s web domain even if you do not want to create your business website today.

Appoint a Registered Agent

The next step in forming an LLC is to appoint a registered agent. A registered agent is also known as a statutory agent or resident agent. 

A registered agent is a person or a company who sends and receives legal papers on behalf of your LLC. These legal papers include official correspondence like legal summons and filing documents. 

Your registered agent must be a state resident where you want to start your LLC. If your registered agent is an individual, he will be a member of your LLC and you. 

File your Article of Organization (Certificate of Formation)

The next step you have to do is to file the formation documents with your Secretary of State. These documents are known by various names, most commonly this document known as Certificate of Formation. It describes the organizational structure of your business. 

Decide on Member vs Manager Management

The next thing you have to do is decide how your company will be managed.

A Limited Liability Company can have one or more owners. If you are a single owner, you don’t have to select between member management or manager management. You are automatically in control of all management decisions. 

But if your LLC has multiple owners or investors, your group will need to collectively manage the company or elect a manager.

Learn More: Member vs Manager Managed LLC

Draft your Operating Agreement

An LLC operating agreement is a legally binding business document that entails the ownership of its members, how the company is managed, and the structure of the LLC or limited liability company.

It can provide details such as one meeting naming a registered agent, selecting managers, and adding and dropping members. 

An operating agreement is not required in every state, but it is highly recommended to have an operating agreement to avoid internal disagreements between LLC members. 

Apply for Business Tax ID

The final step is to apply for your Business Tax ID, also known as Employer Identification Number (EIN) and Federal Tax Identification Number.

What are the Purposes of EIN?

  1. An EIN is necessary for your business tax purposes.
  2. It is also required to open a business bank account in the United States.
  3. It is also needed when you want to hire employees legally.

Applying for an EIN is quite simple and free of cost. You can quickly obtain this by visiting the IRS.gov website.

Another Option

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Micahguru Formation is a U.S. incorporation company that helps founders and entrepreneurs globally to launch and manage their U.S. businesses remotely.

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Conclusion

If you run a real estate business or are looking to start one, this guide is for you. Here I have discussed the benefits of LLCs for real estate businesses, key factors to consider when choosing the state to start your business, and suggest the three best states to consider.