How do you go about setting up a property investment company? How to create a real estate investment company? What type of business or real estate entity do you want to create? This article explores the various types of property investing partnership companies you can setup to protect you and your investment.
it’s wise to setup a partnership structure to protect yourself from legal issues that could arise from owning an investment property.
You will, of course, have property and liability insurance, but it’s also a good idea to protect your money via a partnership structure in case there’s an accident on your property, or an unruly tenant that needs to be evicted. Your liability coverage will handle these issues, but it’s a good idea to protect your estate overall, and for taxes purposes, to setup a company or partnership.
Sole Proprietorship – This is the simplest form of business to operate. Only one person is the owner, and the business is not registered officially at the state or federal level. Employees are allowed, but only one person performs the managerial aspects. Going this route is appropriate if…
- you want to see what it’s like to run your own business.
- you have a side business.
- you are a freelancer or a small consultant.
- you want to own a very small business.
However, you should avoid sole proprietorship if…
- you want a business with multiple owners.
- you have substantial personal assets (Assets of the company and those that belong to you are inseparable, which means that if the company is sued, your assets are fair game to the creditor.)
- you want a business in an industry with high liability risks. (There is no liability protection.)
- you want to solicit outside investors or loans (There are no share or shareholders.)
General Proprietorship/Partnership – This is the most basic form of partnership and, in fact, consists of multiple sole proprietors working together. It does not have to be registered or formed under state law. The major disadvantage is that liability falls under everyone. However, limited liability corporations are superseding these partnerships because most partners want liability protection.
Limited Partnership – This is a partnership where at least one person has liability from any debts, creditor claims, and lawsuits the business may incur. This member, therefore, may not take on managerial roles. These partnerships are used when the limited partners wants to invest their money with liability protection. The general partner will usually be a corporation or an LLC because they will furnish liability protection to those who are managing the business. This type of business must be formed under state law.
Limited Liability Corporation (LLC) – This provides liability protection to its owners and also allows them to participate in management. The members can have the company taxed in different ways, such as a disregarded entity, partnership, or a corporation. LLCs are one of the most popular business manifestations, especially for real estate investments. LLCs are formed under state law.
Corporation – This is the most popular form of business worldwide, and can range in size from the largest companies in the world to single person owned businesses. They offer liability protection and tax breaks unavailable to partnerships. Corporations are formed under state law. There are two types that differ by the way in which they are taxed:
C Corporation – This is the only business entity that is responsible for paying its own income tax. This tax is calculated according to the business’ taxable income, and is based on a graduated tax scale. Although they provide wonderful liability protection and tax benefits, losses are not deductible by the owners and C Corporations can be double-taxed.
S Corporation – This is a corporation that receives special tax provisions under Subchapter S of the Internal Revenue Code. (For example, S Corporations are not double-taxed.) However, tax rules are complex, and S Corporations are limited as to how many members a business can have. Although S Corporations share the same legal traits as a C Corporation, they are taxed like partnerships.
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