It’s time to get serious about your real estate business. If you want to grow as an investor, you will need to structure your business in a way that saves you money, protects you from lawsuits, and fits your goals.
There are more than a few options for structuring your business. You may choose to go into a partnership with others or establish your business in another state. Luckily, there are plenty of resources that can help you make informed decisions and build something that is profitable, protected, and personally fulfilling.
One of the best resources is the Small Business Administration. Use their resources, along with the resources of business planning and legal professionals, to choose the best structure for your real estate business.
What Does the SBA Do?
The SBA is a federal agency dedicated to helping small businesses grow throughout the United States of America. If you are starting a real estate business, you will get to know the Small Business Administration (SBA) very well. In general, a business is considered “small” if its net worth is under $7 million and net profits, after taxes, are under $2.5 million.
The SBA provides counseling, resources, and even funding to small business owners. Even if you have been a real estate investor for some time, keep the SBA’s website bookmarked on your computer.
Financing Options From the SBA
The Small Business Administration doesn’t just offer helpful advice. They can also offer loans to help real estate investors purchase commercial real estate. SBA loans offer longer terms and more competitive rates that are normally reserved to businesses with more resources.
These loans, including the SBA 504 loan and 7(a) loan, do have limitations. Investors can only use these loans to buy or repair owner-occupied real estate. Only 40 percent of the commercial property purchased with these loans can be rented out to tenants. If you meet these requirements, consider applying for one of these loans.
How to Choose the Right Business Structure for Your Real Estate Business
It’s possible to get a loan for a piece of real estate, buy it, and do as you wish without setting up an LLC or S-corp. But this may not work out well in the long run. Unless you have an asset protection strategy, your properties will be left vulnerable to lawsuits. Most asset protection strategies involve setting up a business that limits your personal liability.
Real estate investors should also consider taxes and ownership when choosing a business structure. Some business owners must only file a personal tax return and pay self-employment taxes. Other owners pay taxes as a salaried employee of their own business and pay taxes on the profits made by the business.
If you are not sure which option works best for your business, reach out to a legal services provider or CPA.
Different Options for Structuring Your Business
The SBA has laid out different business structures that are available for your real estate investing business. Once you have chosen a business structure, it’s time to register your business, get tax numbers, and start operating under that structure.
The different structures for real estate businesses include:
- Sole Proprietorship
- Corporation (S-corp or C-corp)
There is a lot to consider when it comes to choosing these business structures. Let’s focus solely on how the different structures impact personal liability.
If you are looking to protect your assets as a real estate investor, a sole proprietorship is not the way to go. Business assets and liabilities are not considered separate entities from the owner’s personal assets and liabilities. If you are hit with a lawsuit, your assets could be at risk.
Limited partnerships and limited liability partnerships are limited to businesses with two or more owners. Liability varies depending on the structure of the partnership, but at least one partner will have limited liability.
Limited Liability Company (LLC)
If you want to separate your business assets from personal assets, consider forming an LLC. Real estate investors can put properties in an LLC for protection.
If the LLC faces a lawsuit, only the properties and other assets within that LLC will be vulnerable. Your personal home, car, or other assets can’t be touched. It’s possible to put one property in each LLC that you own, but that is just one asset protection strategy.
Individuals, partners, or larger groups can form LLCs. Single-member LLCs and multi-member LLCs are both suitable options for real estate investors who want asset protection.
Corporations (C-Corp and S-Corp)
Like LLCs, corporations are separate entities. The owners of a corporation will be protected from any lawsuits that are filed against the corporation. Creditors and plaintiff will only be able to touch the assets owned by the corporation.
It is possible for an LLC to be recognized as a corporation. The biggest difference between an LLC and corporation is how it is taxed and how owners can be paid.
Ready to Launch Your Real Estate Business?
If you are new to real estate investing or have a few properties under your belt already, consider having an asset protection strategy. Forming an LLC or corporation is just the first step in protecting yourself from lawsuits. We live in a litigious country, and a single lawsuit could threaten to take away everything that you have worked for in the past months or years.
Learn more about asset protection strategies and how the right structure could keep lawsuits from threatening your livelihood.
Have you visited SBA.gov? What have you found most useful about this resource?