WARNING: DO NOT READ ABOUT BUSINESS STRUCTURING UNLESS YOU HAVE COMPLETED AT LEAST TWO SUCCESSFUL TRANSACTIONS
I’m not trying to be mean with the warning. I just don’t want you to waste your precious time focusing on things in the wrong order. Try dialing a phone number where you dial the area code AFTER you’ve dialed the 7-digit local number and see what happens. Order counts. I’m mentioning this topic now because chances are, once you’ve started actively investing, you’re going to start hearing horror stories of loss due to lack of preparation in business structuring.
So, let’s take a look at a few ways to structure your business to protect your family and personal assets from legal and financial liability, and to minimize your tax burden. Please note that I’m not a licensed CPA or attorney. I’m just sharing some of the things I’ve become aware of in my time as an investor. When you’re ready to CYA, I strongly urge you to get qualified help from a good local lawyer, accountant, and financial planner who understand Portland laws and tax structures. Here they are.
Business Structuring Types
- Sole proprietorship
- Limited Liability Company
- S Corporation
- C Corporation
This is the most common, and cheapest, form of business structuring. It allows you to use a legal business name, and that’s pretty much it. There is no financial or legal protection of any sort. If there’s a problem, it comes down on you, your savings, your home, your car, your boat, and any and every other personal and real asset you own. However, you can start writing off business expenses, including a home office.
Two or more people come together and share in the risks and the rewards of the business. Many single-property projects that are called joint ventures are in fact partnerships built around a single property. This is one of the reasons why you will see numerous investors who are in completely separate joint ventures with other investors. Each property is inside its own partnership agreement or other corporate entity.
Limited Liability Company
Many people mistakenly refer to this as a “limited liability corporation” but in fact an LLC is more like a partnership than a corporation. LLCs have become very popular in recent years for real estate investors, as they are less expensive and often require less administration than corporations, but still provide excellent liability protection.
The S corp is the “Small” version of the C corporation. It’s simpler to administrate than a C corp, but harder than an LLC. Similarly, the financial tax benefits kick in at a higher revenue level than an LLC.
The Daddy of all business structures, the C corp has the highest administrative burden, but generally provides the greatest legal and financial protection. Of course, you need to be generating something like $100K a year before this even becomes an option for most investors.
The best way to determine the business structuring right for you is to ask yourself a few key questions and share the answers with your mentor, attorney, CPA, financial planner, and marketing team or consultant (believe it or not, how you set up your business can affect how well you get found in Google, and how you market your services). After you’ve gotten all their feedback, then you can weigh the information and make the best decision for you.
Here are a few questions to consider, in no particular order (remember to invite input from your professionals as well):
- How good are you at maintaining records?
- Will your properties ever be occupied by tenants?
- Will you be joint venturing/partnering with other investors, and if so, how often?
- Will you be working from home, or from an office?
- Do you own your own home or any other significant personal or real assets?
- How much will you make from investing this year?
- Will you be using your own funds to invest, and if so, what financial vehicles are the cash in?
- Are you looking to get found online by prospective sellers or buyers?
- Will you be engaged in construction or remodeling, personally or through subcontractors?
Proper business structure is only one side of preparation. In my free video “Seven Biggest Mistakes in Portland Real Estate Investing” at HowToInvestInRealEstatePortland.com I also talk about the members you want to have on your real estate investing “dream team.” So make sure you’re making money in real estate first. Then get your business structuring in order, make sure you are surrounding yourself with the best teams to protect your assets and to take your business forward, and you will enjoy peace of mind as well as wealth of household. Take action and prosper.