Can an LLC Own Real Estate in Illinois?

Wondering what it takes to buy real estate under an LLC? Yes, an LLC can own real estate in Illinois, offering significant advantages such as liability protection and tax benefits, making it an attractive option for organizing business real estate holdings. However, it's important to consider each property's legal insulation from others and the potential implications of commingling personal and LLC funds, among other considerations. This article zeroes in on the steps and conditions necessary for an LLC to secure a property investment. Get ready to understand LLC establishment, financing options, and closing strategies tailored to ensure a smooth buying process.

What is an LLC?  

An LLC, or Limited Liability Company, is among the most common and most versatile legal entities used to organize a business. The primary function of an LLC is to separate the risks associated with the business being conducted by the LCC from the owner's assets outside the business. If the LLC has been lawfully maintained, most lawsuits against the LLC would be unable to reach the owner's non-LLC assets, similar to the function of a corporation.  Additionally, owners are not personally liable for the debts incurred by the LLC. Contrast this to a sole proprietorship, where the sole proprietor is personally liable for all liabilities against the business, including legal judgments and debts incurred in the operation of the business. There are some key differences between an LLC and other legal entity types that present unique opportunities.

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What Makes an LLC a Good Choice?

As mentioned above, an LLC provides insulation for its owners against the liabilities of the business similar to a corporation, but what's unique about an LLC? Whereas a corporation has a tiered membership system with shareholders holding the equity of the firm and elected officers conducting the day-to-day business, an LCC is owned and operated by the “members,” with a single-member LLC as a valid option.  

With a corporation, there is certain formalities that must be observed, for example, yearly shareholder meetings and board meetings with minutes being taken. Failure to observe these formalities can have serious implications, with the potential for the corporation's liabilities to be passed on to the owners. With an LLC you do not have to worry about these formalities. For more information on the management of LLCs please see this article explaining the Fiduciary Duties of LLC Members in Illinois.

The tax implications of an LLC are another selling point that makes this type of business entity an attractive option for businesses. In an LLC, profits are passed through to the members for the purposes of tax, meaning that at the federal level the member's share of the profits are taxed as personal income. This avoids the “double taxation” at the federal level that certain types of corporations face, where profits are subject to a specific corporate tax at the entity level, and then taxed again as personal income when profit is paid out from the corporation.  To learn more about the LLC and other business entity options please check out this article- Differences Between Types of Corporations - exploring them in depth.

Can an LLC Own Real Estate in Illinois?

With the considerable advantages of an LLC in mind, you may be asking can an LLC own property in Illinois? Yes, in fact an LLC can be a great way to legally organize your business real estate holdings. Whether you are intending to use the real estate as a rental property or looking to renovate and flip for a profit, the benefits of an LLC are available to you.  

Keep in mind that liability is contained within each LLC, this has important implications for real estate. If you are holding multiple properties under the same LLC they will all be at risk for their collective liabilities. Conversely, if each property is held in a separate LLC they are legally insulated from each other.  This means that if a lawsuit were to arise out of the operation of one of the properties, the other properties would be safe from judgment.  Depending on the scope of your business it may also be useful to know that an Illinois registered LLC can own property in other states.

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Potential Pitfalls and How to Avoid Them

Although purchasing a house with an LLC entails numerous benefits, being mindful of potential pitfalls is equally important. These include commingling personal funds with LLC funds, the drawbacks of buying a primary residence with an LLC, and the ongoing costs of maintaining an LLC.

We will delve deeper into these challenges and learn how to circumvent them.

Ensuring Adequate Insurance Coverage

One of the potential pitfalls in buying a house with an LLC is not having adequate insurance coverage. Remember, insurance isn’t just about protecting the property itself; it’s also about safeguarding the financial interests of the LLC. Therefore, it’s crucial to customize your property insurance to address specific risks and consider additional coverage for extra protection.

Avoiding Commingling of Funds

Avoiding the commingling of funds is another critical aspect of managing an LLC. Mixing personal and LLC finances can lead to complications and potential legal issues. Remember, one of the main advantages of an LLC is the separation of personal and business liabilities. Don’t jeopardize this by mixing up finances.

Use a separate bank account and dedicated accounting software to keep everything in order.

Can I Live in a Property Owned by an LLC?

While there is nothing barring you from living in a property owned by an LLC you are a member of, there is some considerations to keep in mind that may not make it worth your while. Your mortgage will be negatively affected, with the terms of the loan being less favorable to reflect your limited liability. Similarly, you will also find that insurance rates are higher on properties held in an LLC. Again, this is a reflection of the LLC member not being personally liable. If you are benefiting from the Illinois Homestead  

Exemption, you should note that your home will not qualify for this tax break once it is under an LLC. If you already own your home and are considering transferring the property to an LLC, note that depending on the terms of your mortgage this may require you to pay the remainder of your loan immediately under a “due on sale” clause. For these reasons, an LLC is generally more appropriate as a business vehicle rather than personal home ownership.

Which LLC is Optimal for Owning Real Estate?

You may be interested at this point in using an LLC for your real estate holdings. However, the question you need to ask then is which LLC is optimal for owning real estate? There are two approaches. The first is to setup separate individual LLCs for each individual piece of real estate. The second is an Illinois Series Corporation. This is a business entity that allows for the convenient and cost-effective operation of multiple entities, while keeping their liabilities separate.  

Each entity in a Series LLC formation function independently, meaning that real estate could be separated in much the same way as traditional separate LLCs.  With similar liability protection, deciding between the two can largely come down to cost. To register a traditional LLC, you pay a comparatively lower cost upfront then a higher cost for each new entity, this is the opposite for a Series LLC with a higher upfront cost then a lower cost for each new entity. This means the more business entities you need to register the more attractive a Series LLC becomes.

Can an Illinois LLC own real estate? Yes, and the liability protection an LLC offers can make it a beneficial structure for real estate. However, there are many considerations when choosing the type of legal entity in a real estate acquisition. The most important thing is to inform yourself, and the best way to do that is to speak with a qualified Illinois real estate attorney near you.  The sooner you contact a real estate attorney to assist with the process the more likely you are to have a favorable and smooth outcome, please give us a call.

Frequently Asked Questions

How do I buy a house with an EIN number?

Unfortunately, you cannot buy a house with an EIN number, as it is not possible to obtain a home loan using an EIN number. It is typically used for tax purposes and obtaining a business loan.

What are the benefits of buying a house with an LLC?

Buying a house with an LLC provides limited liability protection, pass-through taxation, and flexible ownership options, which can be advantageous for real estate investment.

What are the steps to establish an LLC?

To establish an LLC, you need to choose a unique business name, secure an Employer Identification Number (EIN), choose a registered agent, and draft an operating agreement. These are essential steps for setting up your LLC.

What are the financing strategies for an LLC real estate purchase?

When financing an LLC real estate purchase, it's important to explore mortgage options, understand personal guarantee implications, and find asset-based lenders. These strategies can help secure the necessary funding for the purchase.