Right off the bat, if one must understand the nature of a company with limited liability, it is a flexible business entity that works well in the case of single-owner companies and combines elements of a partnership and a corporation offering the protection of limited liability. For these very benefits, real estate investors believe that this form of business enterprise can work to their advantage in terms of the liability protection it offers.
However, much like any other form of legal partnership, this one also comes with its pros and cons, so here are five aspects to consider before creating an LLC:
1) First and foremost, an LLC requires care right after it is created which just does not happen by hiring a lawyer as there are some details and traps that you might omit, and which might not necessarily help you maximize on the benefit of limited liability.
2) When working with partners, it is important to protect yourself with situations where partners or co-owners part ways with proper ‘buy back’ agreements or limiting transfer rights.
3) Almost always, negligence is costly and in the case of real estate investors, in not repairing a property properly or in hiring someone to do that but results in negligence, you can be sued personally for the end results.
4) Normally, in picking a type of business entity, the business and tax structure either protects you or is the cause of your downfall. And since your lawyer might consider the most suitable business structure from ‘protection of personal assets’ point-of-view, it might not necessarily match with what you accountant might consider from a taxation point of view. So pick carefully, after weighing the pros and cons.
5) Always pick your accountant and lawyer with great care by evaluating their level of knowledge in your line of business. An inept professional in these areas can cause you to lose a lot of money.