August 9, 2022
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Whether you’re planning to start homesteading, start an equestrian business, or are simply moving to land, you’ll likely run across a common question fairly quickly: is it better to buy land as an individual, or as an LLC?
There are pros and cons of buying land as an LLC. The decision largely rests on both legal and tax considerations. This post breaks down the benefits and disadvantages of each buying strategy so you can decide which is best for you.
Table of Contents
- LLC vs Individual
- What is Personal Liability Protection?
- Pros and Cons
- Should you buy land under a new or existing LLC?
- Best Practices for Buying Land Under an LLC
- What To Do After Purchasing Your Land
- FAQs
LLC vs Individual
What is an LLC?
An LLC (Limited Liability Company) is a type of legal business entity that protects its member(s) from personal liabilities resulting from business activities. Essentially, it creates a barrier of separation between personal liability and assets, and business liability and assets. It ensures that any obligations and debts arising from the business will stay under the LLC.
LLC’s may have one member, or multiple.
What is an Individual?
Individual means a natural person or single human being. It refers to you independently rather than you representing an organization or business.
Can An LLC Buy Land?
Buying Land or a house under your name is common, but can you buy land as an LLC? The answer is yes. You can purchase land or other property as an LLC, meaning that the land or property is registered under your LLC (business) name, not your name. When your LLC owns the land, their are perks and disadvantages that come with it.
What is Personal Liability Protection?
Buying land as an LLC affords personal liability protection to landowners. Purchasing under an LLC provides enhanced liability protection for individual buyers, meaning that legal complications related to the business entity cannot jeopardize an individual’s personal assets. If a lawsuit is filed against landowners who have purchased under an LLC, a court cannot allocate their personal assets to cover damages because their personal assets and liability have been separated from their business assets and liability.
Protecting Yourself from Personal Liability
When purchasing land, the best way to protect yourself from personal liability is to purchase under an LLC. Choosing to purchase land as an individual does not provide protection over your personal assets in the event of a lawsuit. Therefore, assets such as your home or car could be used to cover uninsured damages. When you purchase land as an LLC, only your business assets are liable to cover liabilities resulting from your business.
The Pros and Cons of Buying Land as an LLC
Here are several things you need to consider before purchasing property as an LLC.
The Benefits of Buying Land as an LLC
Personal Liabilities Protection
An LLC separates business liabilities from its members’ personal liabilities. This means an LLC can act as a shield over your personal assets.
For example, when someone is injured on your land, they may try to file a lawsuit against you as an individual, putting your personal assets at risk. However, if the property is owned by your LLC, your LLC is obligated to pay for monetary damages. This ensures that your personal assets won’t be jeopardized.
Avoiding Double Taxation
Whether you own the LLC yourself or you’re teaming up with other members, you can have pass-through taxation. This means that any income generated by the property under the LLC will pass through the LLC to its individual members. Income will only be taxed at the individual level rather than the corporate level. This benefit allows you to avoid double taxation.
Professionalism
It looks more professional when you purchase assets under the name of your company, especially when it’s being advertised for lease. Think about your potential residential tenant, would they feel more comfortable renting a property that belongs to an individual or an LLC?
Privacy Protection
A property owner’s information can be accessed by the public. Given this, when your property is registered under your name, personal information such as where you live and what you do is freely available.
That’s why it’s a great idea to purchase land as an LLC instead of as an individual if you have privacy concerns. Not only does it look professional, it also protects your privacy, especially when your LLC is named after something other than your personal name. Purchasing land as an LLC allows you to keep your personal life private.
Seamless Ownership Transfer
When a property is owned by an LLC, you can transfer membership seamlessly to new LLC members and redistribute ownership shares through inheritance. You can also transfer them as a gift without executing a new need. This means fewer fees and less paperwork.
The Cons of Buying Land as an LLC
The benefits of having land as an LLC might sound appealing, but there are other variables to consider.
The Basic Cost of Running an LLC
If you’re currently planning to build an LLC, you need to understand that running an LLC regardless of property owned, comes with associated costs. LLCs don’t pay taxes, but you will need to prepare the initial cost (when setting up the LLC) and the annual cost before building your LLC.
The “Due on Sale” Clause
When you own land as an individual you can transfer ownership into your LLC. However, problems may arise when the property is mortgaged. Your mortgage lender might notice this transfer and realize that it violates the “due on sale” clause. To avoid these complications, talk to your mortgage lender before transferring to obtain a waiver or pay off the mortgage completely before starting the transfer process.
Funding Difficulty
If you’re planning to pay your mortgage from a lender, buying land as an LLC could make it more difficult to find one. It is easier to find a good lender as an individual rather than as an LLC.
Transfer Tax Obligation
Different states have different tax policies. In some states, such as Pennsylvania, the ownership transfers from an individual to an LLC so be sure to check your state regulation.
Should You Purchase Land Under a New, or Existing LLC?
If you decide to purchase land under an LLC, the next question likely is, should I purchase the land under a new LLC, or an existing one? Here are the pros and cons of both options:
Purchasing Under an Existing LLC
- Pro: Because you won’t have to wait on your secretary of state to process your request, you will be able to purchase more quickly.
- Con: The key reason why LLCs are used is to separate liability. If you purchase your land under an existing LLC, you commingle the liability between any activities on the land and your existing business
- For example, pretend you have an LLC for your horse training business, and you are purchasing land to open a venue or rental property. If someone slips and falls onthe rental property, they could theoretically sue the LLC… which would expose your horse training business to the same lawsuit.
Purchasing Under a New LLC
- Pro: Separate liability. From a legal standpoint, this is the cleanest option.
- Con: You will have to walk through the steps of setting up a new LLC, and obtain a new EIN number.
Best Practices for Buying Land as an LLC:
If you choose to purchase your land as an LLC, you’ll want to follow these general steps:
Step 1: Form Your LLC
Forming an LLC is a fairly straightforward process, with 4 main steps:
- File with your Secretary of State’s office. The good news is, this is a very simple process! You can find more information [HERE].
- Cost: Filing fees will differ per state, with fees ranging from $50-$800
- Time: Usually less than 24 hours
- Obtain your Employer Identification Number (EIN Number). In other words, your businesses’ social security number.
- Cost: Free!
- Time: Less than 10 minutes.
- Execute Your Operating Agreement. This is the contract that governs your LLC, and serves an extremely important purpose.
- Cost: Either your lawyer’s hourly fee; or you can find our lawyer drafted template here.
- Time: If your lawyer drafts from scratch, it could take weeks. You can download and fill out our operating agreement template in about 10 minutes!
- Open a Separate Business Bank Account. This will be the most important way that you can keep your LLC from commingling funds with your other assets (which is the easiest way for a lawyer to overturn an LLC). Banks are typically very easy to work with when opening a business bank account; ask your bank what is required.
Step 2: Purchase Under Your LLC
While this sounds very intuitive, make sure that everything is done under your LLC name. This includes making out any checks or payments as the LLC name, and signing all closing documents as the LLC owner (not as an individual).
What to Do After Purchasing Your Land
No matter if your purchase your land as an individual or as an LLC, you need to deed your property into your trust after purchasing. This will be a critical step in establishing your estate plan. Your estate plan is an important tool to protect your land (as well as all of your assets) from the unknown, allowing you to dictate how distributions will be made.
In Conclusion: Should I Buy Land as an LLC or Individual?
Owning a property as an LLC gives you privacy and personal liabilities protections. However, the difficulty of getting a mortgage can be real. If you want to use your land for any business purposes , it may be wise to buy it as an LLC rather than as an individual. However, if you are purchasing land for your personal use, check with your accountant and lawyer first.
FAQs
Can I buy property under my name and transfer it to an LLC later?
Yes, you can do that. However, before the transfer process starts, make sure that you are done paying the mortgage. Otherwise, you may face problems related to the “due on sale” clause.
Who Owns the Property in an LLC?
If the property is purchased under the LLC name, then the property is owned by the LLC (the business entity). None of the individual members own the property. Specifics of ownership will be dictated by the LLC’s Operating Agreement.
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