Start Your LLC Today!

There are a lot of small challenges to overcome when starting a new business.

If you’re serious about taking the right steps from the outset, one of the first things you’ll want to get squared away is the formation of your business entity.

Most of the real estate investors I know (including myself) own their properties in the name of an LLC (Limited Liability Company), and there are a few reasons why:

1. An LLC can protect your personal assets from business-related lawsuits.
2. An LLC has tax advantages that allow for “pass-through taxation” (whereas some other types of corporations are double-taxed).
3. An LLC offers instant credibility to many of your customers.

Disclaimer: This blog post doesn’t provide legal or financial advice and can’t determine the best entity for your business. I’m not a lawyer or accountant, and your business goals may differ. These are just one set of options; every business has unique legal and tax needs. Always consult a professional before making decisions.

Live outside the US? Everything in this post still applies, but a few steps work differently. Read through the post, then check out the section near the bottom called “Investing From Outside the US?”

How to Register Your LLC

Forming your corporation or LLC may sound like a complicated legal process, but it’s quite simple, and you can do it in minutes.

With an online service like Northwest Registered Agent, you can avoid the mind-numbing minutiae of trying to find the right forms for your state, fill them out correctly, and send them to the right place. You can also do it for A LOT less money than an attorney would charge for the same service.

Of course, an attorney can technically give you the best advice and make sure everything is fine-tuned to fit your situation. But a service like this can do the trick for most people, especially if you’re on a shoestring budget (like I was in the beginning).

As with anything, when it comes to incorporating your business, there is more than one way to skin a cat. I’m not saying you need to pay for a service like this, it just makes the process much easier. If you’d rather file the paperwork with your state yourself, feel free to give it a shot!

If you need help setting up your business mailing address, phone system, or checking account, you can learn more about them here:

• Traveling Mailbox Review: Here’s Why I Switched
• Quo (OpenPhone) Review: My Work-From-Home Setup for Maximum Productivity
• Why Everyone Is Switching to Relay: Uncover the Hidden Benefits

Note: If you have the budget and want to hire an attorney to review your specific situation and ensure you’re doing the right thing, Anderson Business Advisors can help.

RELATED: Death, Lawsuits, and Taxes: Crucial Tips to Protecting Your Real Estate Assets

Should You Form a Corporation or an LLC?

If you’re not well-versed in corporate law, you might feel lost in all the legal jargon of incorporating your business.

That’s okay. I felt the same way in the beginning.

It’s a bit intimidating when you aren’t sure what kind of legal entity to form, how to do it, and the pros and cons of each option. Since I’m not an attorney, I’m in no position to tell you what to do, but I can tell you what I did and why.

When I started my real estate investing business, I registered a new LLC (Limited Liability Company) in the state where I was buying properties. There were several reasons why, but it mainly boiled down to this:

I was the sole owner of the company.

With no other owners involved, several aspects of my business have been simple by design since day one. With only one owner, it’s easier to sign documents, control the company, keep records, do my accounting, etc. It also allows me to avoid preparing a separate tax return for the business each year. I include a Schedule C with my personal tax return and call it good.

An LLC allows for “pass-through taxation.”

With an LLC, I only pay taxes once at the personal level, and it only applies to the net profit that flows through to me personally. I’ve found it to be a much simpler approach, and the fewer times I have to take a hit from taxes, the better.

Every situation is different, so it’s not a bad idea to consult your accountant and/or attorney to decide which type of entity makes the most sense for you.

Where Should You Incorporate?

Another question is,

“What state should I register my Corporation or LLC in?”

It’s a valid question because while most states have many similarities, none are exactly alike. Some states have different tax laws, filing fees, and other factors that can come into play.

It’s also worth considering which state you’ll be doing business in because, in many cases, it will make the most sense to have your business entity registered there.

Again, since I’m not an attorney or an accountant, I’m in no position to advise you on what to do, but just speaking for myself, I chose to register my LLC in the state where I lived, which also happened to be the state where I was planning to do the bulk of my business.

Remember, if you form an entity and do business in multiple states, you may eventually have to register for a “foreign qualification” in any state where your business isn’t incorporated (“foreign” here just means another US state, not another country). This is a whole other topic in and of itself (so try not to get bogged down with it at this early stage), but if you need more details on what’s involved with this, be sure to check out this blog post:

RELATED: Doing Business Out of State? Know When to Register Your Business as a “Foreign Corporation”

Tax ID Number & Corporate Documents

Once your new business entity has been registered in the state of your choice, the next step is to get your Tax Identification Number (aka Employer Identification Number or EIN). You can do it for free through this application form on the IRS website.

This video will show you step-by-step how it’s done.

Keep in mind, the IRS online application requires a Social Security number or an ITIN. If you don’t have either one, see the “Investing From Outside the US?” section below for another way to get your EIN.

If your business is a single-member LLC (like mine is), you can also use your Social Security number as your Tax Identification Number, but to keep this business entity thoroughly separated from your personal finances, it’s not a bad idea to register for a separate EIN anyway.

Lastly, an LLC will need to have “Articles of Organization” (again, this is created when you register your LLC with the state) as well as an “Operating Agreement.”

If at any point you need to create an Operating Agreement for your LLC (note: this will probably be required the first time you close a deal with a title company or apply for a loan in the name of your business), this video explains one easy way to do it…

Clarification: In this video, I describe the registered agent as the person who filed the LLC paperwork. That’s not quite right. The person who files the paperwork is called the “organizer.” The registered agent is the person or company named to receive official legal and state mail for your LLC. It’s often the same person, but it doesn’t have to be.

If you want to create your Operating Agreement through the method I explained above, you can get started right here.

After You Form Your LLC

A couple of things to keep on your radar once your LLC exists:

• Annual report: Most states require you to file a short report and pay a fee every year (or every couple of years) to keep your LLC in good standing. If you use a registered agent service, they’ll usually remind you or handle it for you.
• Business license: Some cities, counties, and states require a general business license. Check with your local government to see if this applies to you.

Investing From Outside the US?

If you live outside the US, you can still form a US LLC and invest in US real estate. You don’t need to be a US citizen or resident to own one. But a few of the steps above work differently for you, so here’s what to do differently (or in addition).

1. You’ll need a registered agent. Every LLC needs a registered agent with a physical address in the state where it’s formed. Since you don’t have a US address, you can’t be your own registered agent. Just let your formation service (like Northwest Registered Agent) fill that role.

2. Picking a state works differently. My advice above (form it where you live or where you do most of your business) doesn’t really apply if you live in another country. Many international investors choose a state with low fees and simple annual filings, like Wyoming. Keep in mind that where you form your LLC doesn’t change the taxes you owe in the state where your property is, and if you do a lot of business in one state, you may need to register there too. If you want advice specific to your situation, Anderson Business Advisors can help.

3. Getting your EIN takes a different route. The free online IRS application (the one in the EIN video above) requires a Social Security number or an ITIN. In that video, I say to get an ITIN first, but you usually don’t need one just to get an EIN. Instead, you can fax or mail IRS Form SS-4 and follow the form’s instructions for applicants without an SSN or ITIN. Fax is faster (often about a week), and mail can take a month or more. Many formation services will also do this for you for a fee.

4. Opening a US bank account. Many traditional US banks want you to come in person or have a Social Security number. Online business banks like Mercury commonly work with international owners of US LLCs. You’ll need your formation documents and your EIN, so do step 3 first.

5. A US mailing address and phone number. Sellers and buyers expect to see a US mailing address and call a US phone number. A virtual mailbox like Traveling Mailbox and a virtual phone system like Quo (formerly OpenPhone) handle both from anywhere in the world. If you plan to send text messages, US carriers require businesses to register before texting, and that registration usually asks for your EIN, so get your EIN early.

6. Two tax things to know about (don’t let these stop you). You don’t need to figure these out before you start looking for deals. Just know they exist so they don’t catch you by surprise later.

• A yearly report to the IRS. The IRS (the US government’s tax agency) wants a short report every year from any US LLC owned by someone who lives outside the US. It basically tells them who owns the company and what money moved between you and the company. It’s due every year, even if you didn’t do any deals, and the fine for skipping it is $25,000, so it’s worth having someone file it for you (more on that below). If anyone mentions “Form 5472,” this is what they’re talking about.
• Part of your sale price may be held back when you sell. When someone living outside the US sells US property, the law usually requires the buyer to withhold part of the sale price (often 15%) and send it to the IRS as a prepayment of any taxes you might owe. It’s not a penalty. If you end up owing less, you can get the difference back by filing a US tax return. The title company (the company that handles the closing) usually handles the paperwork, but plan for it so you aren’t surprised when your first check is smaller than expected. If anyone mentions “FIRPTA,” this is what they’re talking about.

Where to get help with all of this: The simplest option is doola, a company built specifically for people outside the US who want to start and run a US LLC. They can handle most of the steps in this section for you, so you don’t have to piece it together yourself.

• Starter plan ($297/year plus state fees, at the time of this writing): They form your LLC, get your EIN (no Social Security number or ITIN needed), act as your registered agent, give you a US mailing address, and help you open a US bank account with Mercury.
• Tax and Compliance plan ($1,999/year plus state fees): Everything in Starter, plus they file your yearly IRS report and your state’s annual report, and you get a call with a tax professional to ask questions.

If you’re just getting started, Starter is plenty. You can upgrade later, before your first yearly IRS report is due (usually in April of the following year). Getting an EIN without a Social Security number can take several weeks (sometimes a couple of months), so it’s smart to start early.

Before your first sale, it’s also a good idea to talk with a US tax accountant who works with international clients. In the US, these are usually called CPAs (Certified Public Accountants). They can help you plan for the money held back at closing and file your personal US tax return in profitable years. If you’re on doola’s Tax and Compliance plan, start by asking them. Otherwise, search online for “US tax accountant for non-residents” or “CPA for foreign-owned LLC.” Many of these firms work entirely online, so it doesn’t matter what country you live in.

(Full disclosure: some of the links above are our affiliate links, so REtipster earns a commission if you sign up.)

Putting it All Together

As I mentioned earlier, you don’t need to create a corporate entity to get started.

However, if you want to build a serious business that will last for years and protect you from personal liability, I think it’s important to incorporate as a corporation or LLC. When you buy and sell properties in your personal name, you’re putting all your personal assets at risk in the event of a lawsuit, and that’s NOT a position you want to put yourself in voluntarily.

Since it’s so easy to check this box, there’s no reason to be intimidated. Companies like Northwest Registered Agent will make it easy if you need help navigating these steps.

Start Your LLC Today!