Before you start turning your real estate investment projects into a business, it’s crucial to decide how to structure a real estate investment company and what type it should be.
To do this, you should ask yourself some important questions:
- How do I want to organize my real estate investment company?
- How many people will share ownership of the business?
- Am I worried about being responsible for any debts or legal issues?
- Do I want to take advantage of any tax benefits?
- How much time and energy am I willing to put into creating the business structure?
Keep reading to find out about different types of business structures you might consider, and the good and bad sides of each one.
Types of Business Structures for Real Estate Investing
The right business structure for real estate investors depends on different things. Here are the main options you can pick from:.
Sole Proprietorship for Real Estate
Operating your real estate business as a sole proprietor is easy. You’re not making a separate legal entity; you’re just using your own name.
However, there are disadvantages. Because there’s no legal distinction between you and your business, all the debts and responsibilities of your business become your personal ones. If there’s a lawsuit against your properties, it’s against you personally. Your personal assets aren’t protected.
Also, bringing in investors can be tough because sole proprietorships can’t offer shares in the company.
Partnership for Real Estate
In a General Partnership for your real estate business, you team up with a partner, sharing assets, debts, and management duties similar to a Sole proprietorship but with a company. While partnerships can offer benefits, like shared responsibilities, they also come with downsides, such as lacking legal protections in case of a lawsuit and not being ideal for attracting investors.
Limited liability company (LLC) or Limited Partnership (LP)
Two popular types of businesses that real estate investors often use are limited liability company (LLC) and limited partnership (LP). An LLC can be created by one person (a single member LLC) or by multiple individuals (a partnership type LLC or LP), while an LP requires more than one person. Both LLCs and LPs offer legal protection to their owners, meaning that liability for accidents, finances, etc. falls on the LLC or LP with some limitations.
They can also be structured as “pass-through” entities for tax purposes, meaning that all income, deductions, etc. are passed to individual partners, with no taxation at the business level. However, it’s important to note that not all members of an LP are shielded from liability; LPs typically have both general partners, who manage the business and are liable for its obligations, and limited partners, who invest in the business but do not engage in its management.
S-Corp for Real Estate
Another option for structuring your real estate investment business is as an S-Corporation. This choice is more complex and costly to set up compared to the others we’ve discussed, often requiring legal assistance. However, it offers notable benefits such as the ability to be taxed at corporate rates, thus avoiding self-employment tax, and providing a clear separation between personal assets and the business, and protecting against legal threats. Furthermore, an S-Corp provides different ways to bring in investors, such as appealing to venture capitalists, angel investors, and new partners.
Choosing a Real Estate Investment Company Structure
“Pass-through entities” are businesses where taxes aren’t paid by the business itself; instead, income goes through to your personal tax return. These options include being a sole proprietor, partnering with others, forming an LLC, or becoming an S corporation. However, C corporations are different because they have to pay corporate taxes. This is crucial to consider when choosing the option that offers the best tax benefits. Forming an LLC could provide flexibility along with liability protection. You have different choices for LLCs, such as an LLC partnership, an LLC that elects to be taxed as an S corporation or C corporation, PA, or PLLC, which are often picked by real estate agents.
Seeking the Help of Professionals
If you want to learn how to structure a real estate investment company or to find the best real estate business structure for you, it’s smart to talk to a lawyer and an accountant. A lawyer can tell you about your choices and the good and bad sides of each structure. And an accountant can explain the tax benefits and rules for different setups, like being a sole proprietor, having a limited partnership, forming an LLC, or being a corporation.
With their guidance, you can pick the right structure for your needs and they can also help you keep track of your expenses and handle tax statements. It’s really important to think carefully and make a plan for your business, especially if you’ve already written a business plan. This decision should be made with expert advice, taking into account your specific business goals and circumstances.
Structure Your Real Estate Investment Company Properly
Are you ready to boost your real estate investment projects? Before jumping in, pause and think about which business structure fits you best. Ask yourself key questions about organization, ownership, liability, tax benefits, and time commitment. Explore various options like sole proprietorship, partnership, LLC, LP, and S-Corp, weighing the pros and cons of each. Seek guidance from legal and financial experts to ensure you make the right choice for your goals. With their help, you can set up a solid foundation for your real estate venture and pave the way for success.