Any advantage to sole proprietorship for rental
I just bought my first rental home and will be using a property manager. I wanted to understand whether there is any advantage to creating a sole proprietorship. I can could use this to open a business account at my bank for managing the income and expenses, otherwise I can open a new personal account just for the rental. I'll most likely start an LLC next year after I have a few more properties and will need to move any properties I have into that LLC. Thanks!
Well, that's kind of like running the car out of gas and having it towed back to the station you passed before the engine stopped. Things are a bit out of sequence.
You should be buying properties in the LLC so you don't have to deal with the Due on Sale questions when you go to deed the properties into your LLC.
I know - "everyone" does it the way you've started, or so they claim.
Remember also that a Sole Proprietorship is just you "doing business as" the Sole Prop. There is no liability isolation, etc. You also cannot "move" the Sole Prop.'s EIN to a new entity.
Maybe better to start out with at least one LLC, though you should build a proper business entity structure with a revocable trust at the "root" to replace you as owner of the entities, then an S-Corp owned by the trust as your operating company, THEN an LLC owned by the trust and the S-Corp to hold property. That way, no entity is owned by any human person. Everything must still be properly insured, of course.
Dave,
FYSA If you purchase a rental in your own name, you are already operating as a sole proprietorship.
If you take on a partner that would be a general partnership.
Both scenarios offer no liability protection against your personal assets.
Back to your original question. .. I believe the intent of the question is are there benefits to operating in an entity vs sole proprietorship? Correct me if I'm wrong.
Other than the liability protection you gain, it's cleaner way to do business as well a's being ready to take on partners. Also you will run into less desirable financing options with an entity.
As sole proprietor you have the ability to get better financing such as 30 yr mortgages and interest rates similar to owner occupant financing with lower down payments.
You just need to have a checking account separate from your personal account. It can be a single account for all of your rentals to use. You will need some good liability insurance because again SP doesn't offer liability protection.
Personally I have a partner so we run in an LLC. Therefore we gain liability protection and loose the better financing options.
If I were going at this solo I would be doing as your doing and using the better financing until it ran out after 10 deals and maintain a general liability and umbrella policy.
Cheers hope this helps.
Jeff V
Thanks for the replies. I'll try to clarify what I'm looking at. So I went to the bank to open a business checking account to manage the income/expenses of the rental home I bought and they said I need to have a business structure and tax ID. That structure could be an LLC, sole proprietorship, etc. If it's a sole proprietorship I still need to register with the secretary of state. The alternative is not to create any business structure and just use a personal checking account but separate from my other expenses, so a new account number just for my rental. I'm not ready to create an LLC just yet. I'm wondering if there's any advantage to registering the sole proprietorship or if I should just use my personal checking account.
@Dave Vona I'm in the same situation right now. What did you end up doing?
Same situation here. In escrow for a duplex in my own name where both units will be rentals down the line. I wonder if a separate personal account would suffice or if there if it would be smart to go the sole prop route....
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Financial Advisor CA (#424350)
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Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.
As was noted above, by operating as a business you are already a sole proprietor. It sounds like the problem is you are trying to open a business bank account without being a business yet. Yes, you can register a DBA, get an EIN, etc just to be a sole proprietor and open a business bank account - and then do it all over again with an LLC, but why?
There are a lot of reasons to consider creating an LLC and going the business route - for example you have no liability protection as a sole proprietor. But failing that, personal bank accounts tend to be friendly and have less fees than business accounts. When you do create an LLC, transfer to a business account (and make note that the transfer is your contribution to the LLC).
I ended not purchasing any rentals yet, I've been flipping homes to build up additional capital. After talking to a local real estate attorney, I created an LLC to perform the flips. Once I start purchasing rentals I will also create an LLC for those. I won't do any business in my own name for liability purposes.