Many factors should be considered when choosing the type of entity for your real estate investing business. You have to look at the initial costs, the ongoing costs and requirements of maintaining the entity, and the liabilities associated with the type of entity you select. There are several options available, each of which comes with both advantages and disadvantages.
Sole Proprietorship
A sole proprietorship is the easiest and least expensive option. The set-up costs may include a fee to register a fictitious business name, local newspaper advertising costs, and the cost of either a county or city business license. Disadvantages for this simple choice include an unlimited amount of personal liability, no benefit from business income tax rates, and the inability of the business being sold or passed on to any heirs.
Partnerships
Two or more legal entities or individuals normally create this form of entity with a written agreement specifying the purpose, duties, transferability, and management of the partnership. The big disadvantage is that each general partner has unlimited liability. Also, since each partner is self-employed, the partner’s share of income is shown on their individual tax returns. A limited partnership reduces liability since most of the partners are limited partners, which means they have limited liability. These limited partners, however, do not usually take part in the management of the partnership.
“C” Corporation
A “C” corporation has an unlimited number of shareholders, each of which may consist of any type of legal entity. Limited liability and tremendous tax benefits offer great advantages; however, “C” corporations are the most complex type of entity to set up and to maintain. There are also strict requirements that must be followed, so as not to risk losing the limited liability benefit of the corporation. Another disadvantage of a “C” corporation is the double taxation associated with dividend income.
“S” Corporation
An “S” corporation differs from a “C” corporation in that the corporation’s income directly passes directly to the shareholders’ personal tax return, eliminating the double taxation problem. However, “S” corporations are generally limited to a maximum of 75 shareholders, which makes going public practically impossible.
Limited Liability Company
A limited liability company (LLC) is a hybrid corporation and partnership entity. It has the tax and liability benefits of a corporation with the management structure of a partnership. Articles of Organization are required and the members must establish an Operating Agreement.
Making the Right Choice
Since the entity you choose affects all aspects of your business, including advertising and marketing strategies, the legalities of running a business, taxes, and asset protection, you need to choose the one that best suits your situation. There are many books, software programs, and web sites available concerning business entities; however, none of these products offer the experience and knowledge of professionals who specialize in the real estate investing business.
To move beyond the planning stage you have to set up a business entity. The best way to do that is to take the time to learn the concepts and seek the qualified professionals who can help set up your entity. A great way to accomplish both at the same time is to find hands-on training with in-house experts in Asset Protection and Tax Relief. This will ensure that you take the steps necessary to set up your business for success from the very beginning of the business process.
