The United States has a lot of attractions including its numerous beaches, hot and cold weather, lively tourism industry, and rental income! It was not until 1977 that the Limited Liability Company (LLC) came into existence. Previously, only the residents of the United States were able to form corporations while foreigners were unable to experience the benefits of real estate LLCs. Along with this, foreigners were also not able to invest in the US real estate market and corporations. However, ever since the concept of LLCs has been initiated, it has become one of the most preferred forms of business entities for real estate, especially for the foreigners.
Since US non-residents cannot form corporations, they consider forming limited liability companies in the United States. While this limitation curbs them, on the other hand, this creates an advantage for them. The advantage of enjoying the multiple benefits by forming a Limited Liability Company is the answer to the question, “Why U.S. non-residents should form an LLC to invest in real estate?” as asked by many non-residents investors.
If you want to explore the benefits to know why U.S. non-residents should form an LLC to invest in real estate, you will find this blog very helpful.
What is a Limited Liability Company (LLC)?
Those who are concerned about why U.S. non-residents should form an LLC to invest in real estate first need to understand the meaning of a Limited Liability Company (LLC). A LLC is one of the types of corporation structures. In this type of corporation, the members of the company cannot be withheld for the liabilities and debts of the company. This means that in case of lawsuits, an aggrieved client cannot harm the personal assets of the member.
Additionally, Limited Liability Companies are hybrid entities, combining the several characteristics of sole proprietorship, partnership, and corporations. If you want to know the core of why U.S. non-residents should form an LLC to invest in real estate, keep reading this blog.
Moreover, LLCs have attractive features for foreigners. However, on the other hand, it also comes with some disadvantages, with regards to the structure in specific, such as the dissolution of a LLC upon the death or bankruptcy of a member. Also, a LLC Is not considered a better option if the core aim of the founder is to make it a public listed company. To understand why U.S. non-residents should form an LLC to invest in real estate, you should keep in mind that be it residents or non-residents, the primary reason to form a LLC is to enjoy the limited liability benefit. As a foreigner or non-resident, one would be able to enjoy the pass through taxation Also, this is why U.S. non-residents should form an LLC to invest in real estate.
To form LLCs, you need to know that the formation is almost similar to that of a partnership. It also requires articles of association to be filed with the Internal Revenue Service (IRS) and some other steps. However, comparatively, it is much easier to form a LLC rather than a corporation. Also, it has more flexibility in terms of protection. If we compare LLCs to other corporations, it has several advantages over all others. So, all those asking, “Why U.S. non-residents should form an LLC to invest in real estate?” should ensure to read the benefits carefully.
Why U.S. non-residents should form an LLC to invest in real estate? | The Benefits
Now that you know what an LLC is, you should understand the benefits to explore why U.S. non-residents should form an LLC to invest in real estate. Though it is a bit expensive to form this structure as a foreigner, you will be able to enjoy a number of benefits and advantages in the long run.
The main reason behind forming LLCs is the limited liability benefit which foreigners as well as residents can enjoy. While this is the main reason behind forming one, to understand why U.S. non-residents should form an LLC to invest in real estate, read the benefits below.
· Limited Liability Protection
As mentioned above, one of the main reasons as to why U.S. non-residents should form an LLC to invest in real estate is the limited liability protection aspect. When an aggrieved client files a lawsuit over some matter between the company and them, members of the LLC would stay protected and will not have to sacrifice personal assets in this regard. If we compare it to other types of corporations, members may get bankrupt because of the lawsuits. Therefore, limited liability protects them from getting bankrupt.
· Pass Through Taxation
Just like limited liability coverage is one of the most important aspects to form real estate LLCs, pass through taxation is also considered as real estate’s consideration to why U.S. non-residents should form an LLC to invest in real estate. With pass through taxation, members can avoid double taxation by acquiring property through an LLC. This means that the business, or the members of the LLC, will not be liable to pay taxes on income tax profits. So ultimately, LLCs are not taxed on their profits since they are pass through taxation entities.
Apart from the various elements, the core reason as to why U.S. non-residents should form an LLC to invest in real estate is legalization of LLCs. The law of the United States does not allow foreigners to invest in the S-corporation, C-corporation, or any other corporation. This is why they invest in Limited Liability Companies.
Another purpose to form real estate LLCs is the delegating management. This system of responsibilities makes everything simpler and easier. On the contrary, if we see a corporation, it requires several directors and officers for responsibilities which make the procedure a bit complicated and complex. Luckily, LLCs are free to manage by the third parties and owners.
· Tax Savings
Next in the list comes the major advantage of tax savings. To know why U.S. non-residents should form an LLC to invest in real estate, you should understand that real estate moves wealth offshore. Also, you will be able to choose the tax form on your own. This results in tax savings because you get to choose the form of taxes on your own. Additionally, this permits you to be exempted of the taxes of your choice. Aside from this, the limited liability protection, tax savings is also an important and a valuable aspect for incorporating in real estate.
· Less Fees
If you are trying to know why U.S. non-residents should form an LLC to invest in real estate, you should also keep in mind that the other corporations and companies require high fees and are expensive to form. However, an LLC has an inexpensive structure. The maintenance fees and the state registration fees are comparatively less for forming real estate LLCs for foreigners.
· Lesser Risk
The most crucial part for companies is the audit process conducted by the IRS. With LLCs, the risk is very less during the audit process just because there are fewer taxes involved and the LLCs are pass through taxation entities, they are not liable to pay off double taxes, they have lesser risk involved. Unlike a corporation, partnership, and sole proprietorship business, they have greater risk involved because they need to pay taxes on the profits.
· Transfer Ownership
To understand why U.S. non-residents should form an LLC to invest in real estate, you need to know that the LLC structure makes it easy for everyone to transfer the right of ownership. For example, foreigners can easily gift the right of real estate property or holding to their heirs each year. Also, they need not go through the process of signing deeds or agreements. Moreover, gifting the property permits owners to avoid taxes.
· Brand Protection and Credibility
A real estate business requires brand recognition and a lot of credibility. This is why when you add Ltd. after your name, you will be able to gain credibility and instant recognition in the market. Once you incorporate the name of the business with your name, nobody else will be able to copy it, making it your personal brand and protecting its image in the long haul.
· Portfolio Diversification
Foreign real estate properties are tangible assets having several diversification benefits. For example, it has precious metals, bonds, stocks, and much more involved, diversifying the portfolio.
Things Foreigners Should Consider to Form Real Estate Limited Liability Company in the United States
Whether you are a real estate professional in the United States assisting foreign persons in acquiring real estate or are a foreigner investing in the United States real estate properties, you need to understand the laws for the Limited Liability Company. Check out some considerations for why U.S. non-residents should form an LLC to invest in real estate below.
· Legal Structuring
There are 3 options, in general, for US resident real estate investors to choose from. Firstly, a Limited Liability Corporation, secondly, a Limited Partnership, and thirdly, a C-Corporation. Since non-resident real estate investors cannot invest in corporations, they are likely to invest in LLCs. In general, investing in a LLC is also the best route to take in order to gain tax returns and avoid taxes. The legal structuring of the LLC is beneficial for the foreigners with regards to the taxes in specific and delegation, management, diversification etc.
· Withholding Tax
Another important thing to consider while investing in real estate LLC is the withholding taxes. You may need to file taxes in the United States when dealing with real estate property. The IRS is responsible to hold the taxes from the rent and the sale of the property as it is their legal right. These are the taxes the IRS holds from the rental property as an obligation from the real estate investor. However, foreign investors who wish to ignore it, they can use the FIRPTA form i.e. Foreign Investment in Real Property Tax Act.
Moreover, this form would let foreign real estate investors to reduce, or entirely avoid (sometimes), the tax withholding by the IRS. The FIRPTA form would only work if the transferor and transferee are involved and the buyer would be liable to pay the taxes to the IRS. Besides, a foreign real estate investor is also considered as the passive investor. Though it may sound a bit prudent to be a passive investor in the United States but being a foreign passive investor, things can become really simple and easy for them.
· Income Tax Returns
Now that you know why U.S. non-residents should form an LLC to invest in real estate, they should also know that annual tax returns will need to be filed by the foreigner for selling U.S. real property. To provide income tax returns to the IRS, you should fill Form 1040 NR if you are a non-resident alien dealing with real properties, and fill Form 1120-F if dealing with foreign corporations. With these forms, you will able to file the income tax returns seamlessly.
· Real Estate Property Management
If you are a real estate investor, you should know how to properly deal with the foreign investors trading in United States real estate properties. This would help you be compliant with the federal tax laws affecting real estate transactions. For a smooth process, you need to be familiar with the rules and regulations as a foreigner or dealing with foreign persons for selling properties. Apart from this, you also need to be familiar with the income tax return, withholding, and rental income. If you are unable to understand complicated matters, you should consult a local lawyer in your area to help guide you through the process.
Checklist for Non-Residents to Form a Real Estate Limited Liability Company
Now that you know that why U.S. non-residents should form an LLC to invest in real estate, you may also want to know what it takes to start a real estate LLC in the United States. Therefore, here is the checklist for non-residents to form real estate LLC;
· Form Limited Labiality Company for Real Estate
The first thing is to form a real estate limited liability company. You can do this by hiring a credible lawyer. They will help you form a limited liability company. No matter how complex and complicated the steps are, they will ensure forming or hiring the real estate LLC for you. At times, they can act as the buyer in front of the court and use their own name in the form.
· Obtain EIN Number
An Employer Identification Number (EIN) is one of the Tax ID numbers that is required when you need to direct and develop a business in the United States. Therefore, obtaining an EIN number becomes very important for starting a real estate LLC. You can get this number with the help of the lawyer by filling Form SS-4. After all your things are verified in the form, the IRS will soon provide with an EIN number.
· Prepare Purchase Contract
Another important aspect for a foreign real estate LLC is to prepare a purchase contract. A purchase contract will be an authentic source determining that you own the LLC. This can be presented in the court if need be.
· Bank Account
After obtaining an EIN number, you will be able to make a bank account too. With this bank account, you will be able to open a business bank account in the name of the LLC with the United States bank.
· Signature on All Documents
There are several documents which are required when you start a business company or corporation. Similarly, when you form an LLC, you will come across a number of documents. You will have to sign all of them carefully. From the Operating Agreement to all the other formation documents, you need to ensure you sign all of them.
· Insurance Title on Real Estate
Next in the list comes the insurance title for the real estate. This means that you have to get the title of insurance on the property concurrently (with the purchase). You need to get it insured so that the title of the property is secured to claim coverage.
· Property Damage Insurance
Just like you bought the insurance title, you should also get insurance for property damage. The LLC must also have the insurance to cover the damages caused to the property. You can either purchase an umbrella policy, a Business Owner’s policy, or any other insurance policy that you find appropriate. You can also ask your insurance agent, or lawyer, in this regard if you are confused while purchasing an insurance policy. This will keep your property secured from potential losses and damages.
Now that you know why U.S. non-residents should form an LLC to invest in real estate, you may be interested to form one because of the multiple benefits. However, ensure to keep the checklist in mind before making one. Good luck!