Your Step-by-Step Guide to Forming a Real Estate LLC in 2026
There's a thrill that comes with adding another property to your investment portfolio. But there's also the uncomfortable reality that one major lawsuit at any of your properties could wipe out your profits and personal savings.
A slip and fall accident on your property, for example, could lead to tens of thousands in liabilities. According to Davidoff Law, slip and fall settlements typically range from $10,000 to $50,000.
When it comes to individuals with permanent injuries from a fall, you might be liable for over $100,000. This shows how a simple accident on your property could consume years of rental income or even lead to a personal bankruptcy.
Forming a real estate LLC could be a good way to help protect your personal assets in certain situations. This option might make sense if you have substantial personal assets that you want to safeguard.
But the real estate investor (REI) community can be fiercely divided on the topic of real estate LLCs. Some REIs build entire investment portfolios across multiple states without a single LLC, relying instead on umbrella insurance and high coverage limits. Others form separate LLCs for each property. So who's right?
This guide could help you cut through the confusion. It'll help you decide whether forming an LLC makes sense for your particular situation.
You'll learn the step-by-step process to forming a real estate LLC in 2026, and get answers to the common questions that REIs have about LLCs. Questions like, "do banks lend to LLCs?" and "is umbrella insurance enough?" Let’s dive in!
What is a real estate LLC?
A real estate LLC (Limited Liability Company) is a legal business structure that owns and operates investment properties.
According to the U.S. Small Business Administration, an LLC could offer you the “benefits of both the partnership and corporation business structures”. With an LLC, you get the liability protection of a corporation without many of the tax complexities.
In contrast to corporations facing double taxation, the IRS typically treats LLCs as pass-through entities. This allows rental income to flow directly to your personal tax returns.
When structured properly, an LLC for real estate investments could create a legal wall between you and a lawsuit or debt tied to your investment properties.
For example, if a tenant sued over a slip-and-fall, they are suing the LLC, not you personally. Your personal home, savings, and other assets sit on the other side of that wall.
What’s the difference between a real estate LLC and a corporation?
The main difference lies in taxation: corporations may face double taxation, while LLCs do not. The IRS requires C-Corps or S-Corps to file Form 1120 and pay corporate income tax on their profits. When these profits are distributed to shareholders, the shareholders also pay taxes on their dividends.
By default, LLCs do not have this structure. The income directly passes to the owners' personal tax returns, meaning taxes are paid only once. This structure allows a real estate LLC to offer liability protection similar to a corporation without double taxation.
It's worth noting that a multi-member LLC could elect to be taxed as a corporation if it chooses.
Benefits of starting an LLC for real estate
- Liability protection: This is the big one. An LLC helps to create a legal separation between you and your properties. In the event of a lawsuit, your personal assets (such as cars, homes, and personal savings) could be shielded.
- Pass-through taxation: LLCs typically avoid the "double taxation" that corporations face. Profits and losses pass directly to your personal tax return.
- Credibility and scalability: An LLC signals to lenders and partners that you are running a serious business. LLCs could make it easier to track expenses and cash flow, bring on new partners, and manage multiple properties.
- Simpler estate planning: An LLC could make it much easier to transfer ownership of your properties to family members.
The catch: Ongoing maintenance
If you own an LLC, you might be required to pay annual fees. According to LLC University, the national average annual fee for LLCs in 2025 is $90. But these fees could range from $0 in states like Ohio and Arizona to around $820 in California.
You'll also need to maintain separate bank accounts for your business. Mixing personal and LLC funds might break down your liability protection, a legal concept known as "piercing the corporate veil." This could expose your personal assets, such as your car, home, and savings, in a lawsuit.
To further protect your LLC status, you could also observe corporate formalities. Even single-member LLCs are advised to hold annual meetings and keep detailed minutes.
So depending on your operating agreement, you may need to document major decisions like bringing in a partner or changing property management, even if you're the sole member. These formalities could help prove that your LLC is a legitimate, separate business entity, not just a paper shield.
Should you start an LLC for real estate investing?
While LLCs offer liability protection and other benefits for real estate investors, they may not be a good fit for everyone. Here are some pointers to help you decide if forming an LLC makes sense for your specific situation.
An LLC could be a smart move if…
- You own (or will soon own) multiple rental properties. Owning a rental property may come with liability risks, such as tenant disputes, contractor issues, or property-related injuries. As your portfolio grows, your exposure to these risks could increase. This makes it important to consider ways to separate your personal and business assets.
- You're investing with a partner. Investing in real estate through co-ownership without an LLC could lead to shared personal liability for everyone involved. Beyond offering potential liability protection, an operating agreement clarifies roles, ownership percentages, decision-making authority, and exit strategies. These details might make it easier to manage conflicts if they occur.
- You have substantial personal assets to protect. If you own a home with significant equity, investment portfolios, or a large estate, an LLC might shield those assets from liabilities related to a rental property lawsuit.
- You're trying to get a hard money loan. While you can apply for a hard money loan as an individual, a lot of REIs prefer LLCs for holding properties financed this way because of the liability protection they receive. Plus, hard money lenders like Kiavi readily accommodate this structure.
You might wait or use an alternative if…
If you’re just starting out, especially with a house hack, personal ownership may make more financial sense for your first owner-occupied property.
Conventional lenders often provide better loan terms, such as lower interest rates and lower down payment options, to individuals compared to LLCs. The immediate financial benefit of securing a good loan might outweigh the need for liability protection on that first deal.
LLC vs umbrella insurance
Umbrella policies typically cost around $75 for every $1 million in coverage annually. This is often significantly less than the expense of forming and maintaining a real estate LLC.
Does umbrella insurance provide enough protection? It’s important to understand that insurance is a financial tool, not an absolute safeguard. If legal liability exceeds policy limits or a claim is denied, personal assets could be at risk.
LLCs may offer some legal protection for personal assets in these situations. Many real estate investors consider combining LLCs with umbrella insurance to enhance their overall asset protection strategy.
How to set up an LLC for real estate: The 8-step process
Below is a step-by-step guide that could help you set up an LLC in any state.
Step 1: Choose your LLC’s home state
Real estate investors might consider forming an LLC in the state where their property is located, as this is generally where business is conducted. Forming an LLC in the same state may help investors stay compliant with local "doing business" laws and could reduce complications related to foreign entity registration.
For those with properties in multiple states, separate LLCs are typically suggested for each location. LLC formation fees vary significantly by state, ranging from $35 in Montana to around $500 in Massachusetts, based on information from LLC University.
Step 2: Select and reserve your business name
Choosing a name for your LLC involves more than just picking a title you like; it may also be an important step for your liability protection. Legally, your business name must include a designation such as "LLC" or "Limited Liability Company." While you have freedom in your choice, using a generic name like "Sunrise Properties, LLC" instead of a personal or family name might help maintain your privacy.
Before you finalize your decision, be sure to search your state's Secretary of State database to check if your desired name is available. Taking this step could help ensure your business starts on the right track as you manage your real estate financing.
Step 3: Appoint a registered agent
State law requires every LLC to have a registered agent. That is, a point of contact for official state correspondence, tax notices, and legal documents. The registered agent has to have a physical address within the state—P.O. boxes aren't allowed.
You have two options: serve as your own registered agent, which puts your home address on public record, or hire a registered agent service for roughly $100 to $300 annually.
For real estate investors prioritizing privacy, this could be a smart expense. It keeps your personal details off public records and might help ensure you don't miss important legal documents.
Step 4: File your Certificate of Formation (Articles of Organization)
To create your LLC, you need to file Articles of Organization with the state. This document includes your LLC's legal name, the name and address of your registered agent, the purpose of the business (e.g., "real estate investing and related activities"), and its management structure (member-managed or manager-managed).
Most states allow online filing through their Secretary of State website. Processing times typically range from 1-14 days, though expedited services may be available for an extra fee.
Step 5: Create an LLC operating agreement
Most states don’t require LLC Operating Agreements, but having one could help establish the legitimacy of your LLC and its distinction from its owners as a separate business entity. Courts often consider this distinction when determining whether the corporate veil should remain intact.
Additionally, an Operating Agreement may be necessary to open a business banking account, even for single-member LLCs. Banks typically want assurance that your business exists as a legal entity separate from your personal finances.
For real estate investors, an Operating Agreement might include details such as capital contributions, ownership percentages, property acquisition and disposition procedures, expense and profit sharing, and member roles in property management.
You can customize templates online, or consult with a legal professional to create one that fits your specific needs.
Step 6: Get your Employer Identification Number (EIN)
An EIN is much like your business's SSN (Social Security Number). According to the IRS, you'll need it to open a business bank account, file taxes, and handle payroll if you hire property managers or contractors.
You can get it for free at IRS.gov. If you apply online, you may receive it immediately. Alternatively, you could submit your application by mail and might receive your EIN within 4–6 weeks.
Step 7: Open a dedicated business bank account
This step could be crucial for preventing piercing the corporate veil. All property-related income and expenses might have to flow through this dedicated account.
Mixing personal and business funds is known as "commingling." As legal experts at Wolters Kluwer warn, this is the primary reason a court might decide to pierce the corporate veil. It potentially destroys the liability protection you formed your LLC to achieve.
Step 8: Fund the LLC & transfer the property title
Finally, transfer the property into the LLC’s name. There are a couple of approaches depending on your type of financing. If you’re purchasing with cash or a hard money loan, the LLC could buy the property directly.
With a conventional loan, you might initially have to buy the property in your own name, then transfer it to the LLC through a quit claim deed.
However, you should understand that using a quit claim deed could trigger the due-on-sale clause. This means your lender might request full repayment of the remaining loan balance. It’s a good idea to consult with your lender and a real estate lawyer before making this decision.
Do banks lend to LLCs?
The truth is most banks won't give a mortgage to a new LLC without a credit history.
So the workaround some REIs use is: they buy the property in their own names, and then transfer it to the LLC (with lender permission). The other option is to use a lender like Kiavi that readily works with LLCs.
Conclusion
This article explains how you could set up an LLC, even if you're new to real estate investing.
Keep in mind that an LLC might not be the best fit if you're just starting out with a single property and using conventional financing. However, as your portfolio grows, it may become a more valuable option to consider.
Ready to finance your next real estate investment property? Get a free estimate online today and take the next step in growing your investment portfolio.
Frequently Asked Questions (FAQs)
1. Who owns the property in an LLC?
In legal terms, the LLC owns the property, while you, as the real estate investor (or "member"), own the LLC. This structure could help provide asset protection for real estate investors.
2. What is the new rule for LLC owners in 2026?
A January 2024 federal rule, the Corporate Transparency Act (CTA), previously required real estate LLCs and corporations formed in the U.S. to file a Beneficial Ownership Information (BOI) report with the U.S. Treasury's FinCEN. The rule was designed to prevent illegal financial activity.
But FinCEN recently modified the rule. As of March 2025, U.S. companies (including domestic LLCs and domestic corporations) are now exempt from beneficial ownership reporting under the CTA.
However, some states like New York still have their own LLC transparency requirements. In New York, the Transparency Act goes into effect on January 1, 2026.
3. Can I put multiple properties into one LLC?
Yes, you can place multiple properties into one LLC, but it’s often not the best approach. Combining several properties into a single LLC could increase risk—if a lawsuit arises at one property, all the properties within that LLC might be exposed.
To enhance liability protection, some real estate investors may choose to create a separate LLC for each property or establish a threshold based on property value before forming a new LLC.
In certain states, a series LLC could be worth considering. It might provide similar liability protection without the administrative complexity of managing multiple LLCs. That said, this option also comes with potential risks that should be carefully evaluated.