Forming a business entity for Real Estate Investments

Have you ever purchased a piece of property? Are you well aware of how much paper work is and can be involved in the transaction?

Sometimes this seems like overkill, but it is actually necessary. The paperwork is in place to protect all parties and to preserve your rights. The paperwork is just part of the business and comes with the territory.

However, most investors don’t realise that just as the lack of a contract will leave them unprotected on an investment, the lack of paperwork for their business entities leaves investors even more vulnerable.

Part of doing business is when you have formed a business entity like one corporation, limited partnership or Limited Liability Company.

Keep reading… we give you tips to help you forming a business entity for Real Estate Investments

This way you have the necessary documents in place to insure that you are protected from the liabilities of the business, as well as the business being protected from your personal liabilities.

At the end of the day we want to be able to sleep at night.

Forming a business entity is not as challenging as it may seem but there is quite a bit of paperwork that comes with it, but be aware that it is that paperwork that will protect you if you ever face legal action.

The legal existence of every formal business entity begins with the filing of the business with the Secretary of State.

Fortunately, many states have modernized their systems and now allow for online business filings, I would recommend using myusacorporation.com.

This allows for you to easily file your Articles of Incorporation, Certificate of Limited Partnership or Articles of Organisation or Formation for your LLC. Please note that dependent on what type of entity you choose, you may need additional documentation.

For instance, Corporations have bylaws, resolutions, and minutes, limited partnerships have a partnership agreement and LLCs need to have an Operating Agreement to give everyone involved the protection they deserve and need.

These documents serve as a contract between those involved in the business and outlines rights and responsibilities of all parties.

Your state laws will dictate the necessary paperwork for your corporations, LLC’s and limited partnerships. Generally, corporations are the most paperwork intensive.

Not only are there various documents needed immediately after formation, but corporations normally will need annual internal documentation as well. It sounds like a lot to do, but it really is not as difficult or challenging as it seems.

For most real estate investors, I would recommend choosing an LLC over the other choices as I believe it is the most accommodating and offers the most protection and greatest tax benefits, but obviously you should speak with an accountant and lawyer before deciding on an entity.

LLC’s can be identified as an S Corp or a C Corp and can have multiple members or just a single member, the choice is totally yours but you will definitely want to be in touch with an accountant and attorney before making the choice.

Forming an LLC to hold property assets is a good idea if you are actively investing in real estate. However, forming an LLC may not serve as the best holding vehicle for every property owner.

Just because LLCs offer a multitude of benefits to real estate investors and their particular industry, it does not mean they are the right choice for every investor.

Keep in mind that the field of real estate investing is incredibly diverse, and it would be nearly impossible to find one legal entity that protected every business so be sure to do your due diligence and ask other experienced investors for their opinion and what they would recommend.

Current laws make the prospect of forming a LLC very enticing to real estate business owners. They provide a lot more protection for business owners than liability insurance.

But the real benefit is that peace of mind knowing you are protected. Investors can sleep comfortably knowing they are safe. It’s also important to know any lawsuit that comes against an LLC is aimed specifically at the company, not the individual responsible for it, in other words folks can only come after what you have in your LLC, they are not able to touch any of those assets outside your LLC.

If the property in question were owned by an LLC, the owner’s risk exposure would be insulated by the protection of the company, leaving only the assets owned by the LLC exposed to potential lawsuits. In other words, personal finances would not be in jeopardy.

In addition to liability coverage an LLC also offers great tax advantages.

Any income and capital gains generated by the LLC would rise above to the owner, who, as a result, would only have to pay taxes as an individual.

However, the respective owner still enjoys the protection against liability. It really is the best of both worlds.

Seeing as how there is no separate tax accompanying the formation of an LLC, business owners are in a position to avoid double taxation. Neither the rental income generated by a property, nor the appreciation in value incurs tax penalties. In forming an LLC, you are not only subjected to fewer taxes, but you are awarded more deductions.

There are of course, other options to choose from when forming your business entity. Those other choices include corporations and Limited partnerships to name a few.

Whichever you choose, I would strongly recommend you doing your due diligence and research before choosing a specific entity.

When you create your business, you are seeking the protection that the state laws provide for formal business entities. In order to receive those protections, the business has to follow the formalities set forth in the state statutes or the operating documents of your businesses.

After deciding on your specific entity, make sure you have proper paperwork in place and keep everything up to date. God forbid, you ever face legal action you will need to have your ducks in a row as ignorance will never be an excuse in the courtroom.

In closing, I strongly recommend forming an entity and prefer an LLC over the others when starting a business.

Insurance coverage is a wonderful thing but it would not be sufficient on its own and works much better in tandem with a legal entity.

Structuring your real estate business under a LLC will simultaneously lessen your risk as well as protect your assets – I can’t tell you how valuable this is, it is absolutely priceless.

I believe for a real estate investor forming an LLC is one of the best decisions an investor can make. If you are serious about your business, you must put in the necessary time to form an entity as the alternative is not worth the risk.

Some novice investors ask if they can until they buy their first property to form a business entity, while I suppose they can I would not recommend it as you always will want that protection that a business entity provides.

Forming an entity is not as difficult as it may seem and is necessary for any investor, so take the time to choose one and before you make a choice, definitely do your due diligence and get in touch with an accountant and an attorney to make certain you understand which entity to choose and in particular the advantages and drawbacks of each.

Happy Investing.