Owning property in Texas puts you in a decent financial position – especially if you’re renting the property and making a profit on it. But if you want to make your profits consistently, and mitigate potential risk, you need to strategically plan to protect yourself.
One way to protect yourself – and your entire real estate operation – is to form an LLC for your investing needs. But how exactly does this work and is it worth the money and effort to protect your rental property in Katy, Houston, or another Texas city?
A limited liability company (LLC) is a type of organization meant to provide liability protection to the owners of the organization (plus some other benefits). Like a corporation, it’s treated as a separate legal entity, meaning it can take on debt, hold assets, and be targeted in a lawsuit just like an individual person. It’s also treated as a “pass through” entity for tax purposes, meaning the LLC won’t owe taxes on the money it makes; instead, you’ll pay taxes on the money you withdraw or receive from the LLC as an individual.
The rules and requirements for LLCs differ by state. Each state has a slightly different process for how to form LLCs, how LLCs are treated and taxed, and how to actively maintain an LLC. But for the most part, starting an LLC is relatively straightforward and inexpensive.
In Texas, LLCs aren’t required to file annual reports with the Secretary of State, but you will need to file annual franchise tax reports.
Why would you form an LLC for your real estate interests?
But one of the biggest risks you’ll face is legal action. If a tenant hurts themselves at your property, or if you treat the tenant unfairly in some way, they can hypothetically sue you. A liability insurance policy can provide you with some protection, but you’ll still be named as an individual in these matters, meaning you’ll be held personally liable for the damages. If you create an LLC for your property, you’ll enjoy a layer of extra protection for yourself; the LLC can be held liable instead of you.
There are some downsides you’ll need to consider as well.
If you have a property management company working on your behalf, you may benefit from some liability protection without the need for an LLC. Your property manager will likely be liable for a variety of possible issues related to your property and your tenants; this is highly dependent on the initial contract you sign, so make sure to investigate the details and understand what you’re signing.
In some situations, it pays to create an LLC for your real estate investment interests. If you’re managing properties alone, if you’re building a business with a partner, or if you plan on scaling up your operations significantly in the future, this is especially true. But there are also situations where creating an LLC is unnecessary – and may add some complexity to your property management approach.
Navigating the worlds of real estate investing and property management are tough, but it’s even tougher when you’re making every decision without professional guidance and advice. Green Residential exists to make your Texas real estate investing decision easier – so contact us today for your free consultation!