In this article...

This article will discuss the options available to someone looking to acquire real estate and property with an Illinois LLC. We will answer the following questions:

  • What is an LLC?  
  • What Makes an LLC a Good Choice?
  • Can an LLC own real estate in Illinois?  
  • Can you live in an LLC?
  • Which LLC is optimal for owning real estate?

Key Takeaways

This article will discuss the options available to someone looking to acquire real estate and property with an Illinois LLC. We will answer the following questions:

  • What is an LLC?  
  • What Makes an LLC a Good Choice?
  • Can an LLC own real estate in Illinois?  
  • Can you live in an LLC?
  • Which LLC is optimal for owning real estate?

Making the right choice for your business when you are considering what legal entity to use is one of the first and most important decisions you will need to make when starting out. If you do not have a background in legal matters or are branching out into real estate for the first time, you may find the choice daunting.  

You need to optimize the legal protection of your assets while being conscious of the tax implications, all the while keeping abreast of the legal requirements to maintain your legal entity. When purchasing real estate, this question takes on even more importance as you will have valuable assets that will need protecting. Doing your homework and learning about the legal options is the first step.

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.

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 being 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 make 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.

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.

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