When trying to determine the best business entity for real estate investing, you may notice that the process is slightly tedious. You will have to deal with tons of paperwork, documentation, and go above and beyond to make sure you and your investment is legally protected.
Whether you go about choosing a corporation, limited partnership, or limited liability company, there are some steps that you should take not just to protect your business, but also to your personal assets as well!
There are three main business entities that you will want to assemble investments around. Here are the three types of business structures: Limited Partnerships, LLC’s, and Corporations. We are going to go into detail so that you can figure out which investment structure is the best one for you!
Step 1: Be Aware that Judges Have No Patience for Lack of Paperwork
While this may seem like general advice on face value, it is important to note that judges expect you to maintain a steady flow of paper work. When you first begin your business, it is critical to be aware of how your local state laws protect you. Also, in order to receive the specific protections in accordance to whatever business structure you choose, it is critical that you follow the specific formalities put in place in order to have a legitimate real estate investment business.
Step 2: Determine Who Will Manage Your Investments
Who is going to be managing all of your investments? Is it going to be member managed or manager managed? If you decide that you are going to have a manager directed limited liability company, then it is critical that you have an operating agreement that reflects the fact you are a manager controlled LLC. If it is just one person managing, then your business can be treated as a sole proprietorship for tax purposes. Multiple management means that you will be taxed as an “S” corporation or “C” corporation.
Step 3: Determine if You Want to Appoint Officers and Have Annual Meetings
Whatever business structure you decide to choose, it is important that you realize if yours requires the appointing of officers and the conducting of annual meetings. This is usually something that people relate to corporations; however, many LLC’s are required to have these operations within their business.
Step 4: How Much Paperwork Do You Want to Deal With?
This news may not be surprising to most; however, corporations deal with the most paperwork compared to any other business structure. With an LLC business structure, many business owners try to escape the pain of paperwork by going to their local office store and obtaining 8 quick pages of documentation to cover themselves.
However, in the end, it is absolutely critical that you obtain the necessary documentation, no matter how many pages, or what business structure you decide on. In addition to the paperwork, if you do go with a corporation, there are many forms of documentation that will be required by the state government as soon as you form. Last but not least, annual internal documentation will be required.
Step 5: How Many People are Starting the Business?
If you are starting the business with partners, then you may want to think about going for a Limited Partnership structure. This is extremely important, especially if you are a passive investor. If there is a general partner and a passive partner, then the duties need to be expressed as such. If you are the passive investor, then it is critical that you find out what kind of management authority the general partner possesses when dealing with this business.
It is critical that you consult the services of an experienced CPA so that you know exactly how each of these business structures affects your taxation rates. By doing this, you can ensure the greatest amount of return for your business.
For more information on the right structure for your Real Estate Investing, contact ABIP CPA today!