When you make the decision to invest in and manage properties, there are many critical legal issues that should not be ignored. One of the best steps to consider when you are getting involved in the property market is to consult with an attorney to make sure you have all of the legal areas covered.
Deciding whether to establish a business entity?
One of the steps you will need to take is determining which business entity will best suit your needs. There are 5 different options:
personally owned
sole proprietorship
partnership
limited liability company
corporation
A number of factors should be considered in determining which option is best for your circumstances. The entity you select should meet the following five objectives:
Reduce taxes and provide you with the greatest overall return on your investment
Allow for the best asset protection possible
Offer privacy
Allow flexibility and adequate options regarding management and control of your investment property
Reduce the cost and complexity of maintaining the business entity
As a new real estate investor it can often be frustrating and confusing to determine the best business entity for your real estate holdings. Although some advisors may advise you that an LLC is the best option, you may still find others who will say that a trust is definitely the best choice. Ultimately, it depends on the aspects related to your particular situation.
Factors that should be considered when choosing a business entity include:
What type of property are you purchasing? (Commercial, single-family, multi-family, etc.?)
How long do you plan to hold the property? (Fix and flip, long-term, etc.?)
What is your projected income over the course of the next few years? What type of income will you be earning?
What is your exit strategy for the property? (Lease option, sale, owner financing, etc.?)
What other types of investments are you involved in?
The level to which ownership interests can be transferred should be thought about as well. Ownership interest includes the right to share in a business’s earnings as well as the right to participate in managing the business. In a limited partnership or perhaps a general partnership, owners retain the right to transfer financial interests, but it must be understood that they cannot transfer management interest without the permission of all other owners. In a corporation, it is possible to freely move entire ownership interest. In a general partnership and sole proprietorship, there are a limited number of possible business owners.
Answering the above questions can help you in determining the best business entity for your real estate investment. While an LLC could be a good option, there can be circumstances in which an LLC could cause much higher taxes than other options, such as a Trust or Corporation. To make the best decision possible, make sure to spend ample time considering the answers to the above mentioned questions.
Also, consult an experienced real estate and asset protection attorney. It is also a smart idea to seek the advice of an income tax advisor in creating a strategy that will help you to select the best business structure for your property investments from a tax perspective as well as a legal perspective. Be sure your attorney and your tax advisor work together in a team effort so that you are able to develop the best strategy for your particular situation.
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