If you want to make a business out of your real estate investments, you need to think carefully about what kind of business you want to run.
- The right answer depends on your situation, but there are a few important things to think about:
How do I set up my business to make real estate investments?
- How many people will own the business?
- What should I know about being responsible?
- What do I think about tax breaks?
How much work do I want to put into making a business that does everything?
Read on to learn about the different types of business structures you should think about and the pros and cons of each.
There are different ways to set up a business to make real estate investments.
Starting a real estate business with just one person
There are many ways to buy and sell real estate as a business. A sole proprietorship is the easiest way to run a real estate investment business. It is not a legal person, and all of its debts are the responsibility of the business owner. Without making a new legal entity, you can do rehabs as a sole proprietorship in your own name or under a “trading as” name. Even though this is the easiest and least expensive way to start investing in real estate, it has many problems.
One of the biggest problems is that many people can’t get a loan from a real estate investment lender. This is because some state laws say that only businesses can get loans. One more reason why real estate investment lenders might not want to lend to a sole proprietorship is that they don’t want the loan to look like a personal loan. Most of the time, private lenders don’t give money to people.
If you run a business as a sole proprietor, you also take on more financial and legal risk if something goes wrong on the job site.
Lastly, when you do business under your own name instead of as a legal entity, you get fewer tax breaks. Using your own name might be the easiest way to move forward, but it might not be the safest or cheapest. Creating an LLC or LP to invest in property
Two other types of businesses that real estate investors often use are the limited liability company (LLC) and the limited partnership (LP).
The LLC can be made by one person or by more than one person. This is called a “single member LLC” (a partnership type LLC or LP).
It takes more than one person to make the LP work.
LLCs and LPs give their owners some legal protection because the LLC or LP, not the owner, is responsible for things like accidents, finances, etc. (with some limitations). For tax purposes, LLCs and LPs can both be set up to be “pass-through” entities. What does it mean? The business is not taxed if it is set up as a pass-through entity. Instead, all income, deductions, and other things are given to each partner.
It’s important to remember that not all LP members are safe from liability. Most of the time, both a general partner and limited partners are part of a limited partnership. The limited partners can put money into the business and share in the profits and losses, but they don’t help run the business. The general partner is in charge of managing the business, but he or she is still responsible for the obligations of the limited partner.
Starting a business to buy and sell real estate
Lastly, some real estate investors set up businesses. A corporation offers the most protection to its owners, but it is also the most expensive and hardest to start up and run. Most of the time, they have to pay taxes on their own instead of “passing through” income to the owner.
Talk to a lawyer and an accountant about how to set up your real estate business in the best way.
A lawyer will tell you what your options are and what the legal pros and cons of each type of business structure are.
An accountant can tell you about the tax benefits and requirements of different business structures, such as sole proprietorships, limited partnerships, limited liability companies, and corporations.
This will help you decide which structure will work best for you. They will also help you keep track of your business expenses and, of course, make tax statements for your business when you need to.
You should put a lot of thought into setting up the right business entity for your real estate investment business. If you followed RFG’s advice and made a business plan, it should explain the structure you chose and why it’s right for your business.
This is a part of planning for your business and should be done carefully, with thought, and with the help of professionals.
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