Investing in real estate can be a great way to make money, but you have to protect yourself from liability. A real estate limited liability company (LLC) allows you to manage your investment and enjoy the profits without worrying about losing everything if it goes bad. The LLC is a legal entity separate from yourself. It owns the real estate and is on the hook for any associated liabilities. An LLC can have multiple owners, known as “members,” so you can invest in a property with others. Creating a real estate LLC can be beneficial for almost any type of investment or development, such as buying residential or commercial properties to rent, fixing-and-flipping homes, or developing new properties. Read on to learn more about real estate LLCs in Virginia.
Choose a Name
Your business will need a name whether or not you form an LLC. Giving your business a name creates a distinction between business activities and your own personal finances, which is the first step in protecting yourself from business liabilities. You can open a bank account in the company’s name, for example, to keep business funds separate from your own.
Virginia law requires the name of an LLC to include the following words or abbreviations:
The name may not contain any words or abbreviations that suggest it is another type of business entity, such as a corporation or limited partnership. It must be distinguishable from other business names reserved or registered with the state. If you’re finding it hard to come up with ideas you can use a name generator to get some options.
You may reserve a business name for a period of 120 days by filing Form SCC631 with the Virginia State Corporation Commission (SCC). You can renew the reservation for an additional 120-day period. Each filing costs $10. Reserving the name prevents anyone else from registering a Virginia business with that name.
Registering a business or reserving a name with the SCC only gives you the right to use that name in Virginia. Another business might have that name in another state. The U.S. Patent and Trademark Office registers brand names and business names nationwide. You can search their records to see if anyone has registered a trademark on the name you want.
Create a Business Plan
A business plan provides a roadmap for your investment goals. Different types of real estate investments require different strategies. Some investments involve short-term holdings, while others look to make long-term profits. Your business plan can show how you intend to approach the investment, respond to likely or possible roadblocks, and generate revenue. Many real estate investments also need an exit plan.
Be Aware of Contractual Limits
Investing through an LLC may not protect you from all potential personal liabilities. Two possible roadblocks may include the following:
Appoint a Registered Agent
When you register your LLC, you will need to designate someone as its registered agent. This individual or business will serve as your representative to receive service of process and official state correspondence.
An individual may serve as a registered agent if they are a Virginia resident and either:
A business entity may serve as a registered agent as long as it is registered in Virginia. An LLC may not, however, serve as its own registered agent. Many businesses offer to be registered agents for Virginia LLCs in exchange for an annual fee of around $50 to $100.
You will officially designate your LLC’s registered agent and registered address when you file Articles of Organization with the SCC. You can change the registered agent or address at a later date at no charge.
File Articles of Organization with the State
Filing articles of organization is the official step to create an LLC in VA, and you can do it online or by downloading and filling out Form LLC1011. The filing fee is $100, which is paid to the SCC. Information you will need to file includes the following:
Filing online will typically get a much faster response than filing a paper form by mail or in person. The address to file by mail is P.O. Box 1197, Richmond, VA 23218-1197. To file in person, you may deliver the form to 1300 East Main Street, Tyler Building, 1st Floor, Richmond, VA 23219.
Create an Operating Agreement
Virginia does not require the members of an LLC to have an operating agreement, but it is a very good idea. In the absence of an agreement, the provisions of the Virginia Limited Liability Company Act will apply.
An operating agreement allows the members to create their own arrangement for running the business, handling income and expenses, and splitting profits and losses. Even if you are the only member of your LLC, an operating agreement can help you maintain standard procedures and indicate to lenders and others that you know what you are doing.
Understand and Follow State and Local Regulations
Real estate is subject to numerous laws and regulations. Your investment activities will almost certainly require business licenses and permits. The types of licenses and permits that you will need will depend on what you have planned.
Zoning ordinances, for example, may limit how you can use a parcel of property. If you buy a property zoned for a single-family residence, you will not be able to build a multifamily residential building there without receiving a variance or having the property rezoned.
Any type of building or remodeling job will probably require building permits from the local government. Businesses may require certificates of occupancy, fire marshall certification, health department licenses, and so on. The local city or county clerk can provide you with more specific information.
Additional Steps Before Launching Your Business
Forming a real estate LLC is only one step in the process of getting ready for your real estate investment. The following steps can help you protect yourself from liability and keep your business running smoothly.
Obtain an Employer ID Number
An Employer ID Number (EIN) serves as a unique identifier for your LLC. You can obtain one free of charge from the IRS. You will need an EIN in order to open a business bank account or take out a loan.
Learn Your Tax Obligations
Doing business through an LLC will affect how you file taxes. The LLC is a separate legal entity, but it does not pay taxes itself. If the LLC has two or more members, it is a “pass-through” entity for tax purposes. This means that the profits and losses pass to the member in proportion to their ownership interests. They pay federal income tax on their share of the profits, or they deduct their share of the losses. A single-member LLC is a “disregarded entity,” which means the member reports profits and losses in a schedule on their personal tax return.
Suppose an LLC has three members, Andrea, Brenda, and Charlie. Andrea owns 50% of the business, and Brenda and Charlie each own 25%. The LLC has $40,000 in profit for the year. Andrea will owe tax on $20,000. Brenda and Charlie will owe tax on $10,000 each.
Open a Bank Account
To maintain the liability protection offered by an LLC, you need to keep business and personal property separate. Opening a bank account in the LLC’s name is the first step in doing this. Make sure all business revenue goes into that account, and all business expenses are paid from there.