I am currently building a business model and researching types of organizational structures and their implications to real estate, the question is what business structure do you use and why? LLC, C-Corp, S-Corp, Sole Proprietorship just to name a few.
Im reading a book on the tax advantages of a C-Corp but it states they don't apply to real estate without going into much further detail. What structure has the most tax advantages while protecting its owners and allowing for the use of investors?
Thank you for any input
Is it just you in the business?
What is your business?
@James Wise at this point yes it will just be me. I am married if that matters.
LLC seems to be the entity of choice to hold real estate. My accountant told me that a 2 person LLC is harder to pierce the veil than with a single member therefore has more protection against lawsuits. But a single member LLC is a pass through entity (meaning it doesn't change your taxes or filing at all) which makes it easy and cheaper for doing taxes. A 2 member LLC is going to be more complicated to file and you'll probably have to pay your accountant a few hundred dollars a year extra to file.
Do you have a need to set up a business
Eventually I hope to be doing this enough to make enough money to justify setting up an official business for it. LLC seems to be the answers, I just thought there might be tax benefits to a C-corp not available to the other types in order to shelter the cash flow from taxes.
No tax benefits. And as someone above said, the asset protection of LLC is overhyped by lawyers and gurus. Landlord insurance and not doing negligent stuff is the first line of defense. If you have just 1 SFR, just keep it under your own name for now.
@Andy Kaye I plan to buy one quadMFR in the next few months, I wont choose an official business model until i talk to a cpa or real estate lawyer and have more properties. thank you for the advice
Before I attempt to answer your question, you need to know two things:
• I am not an attorney and am in no way qualified to give legal advice. You will need to talk to competent authorities before you do anything.
• I am a Realtor in Las Vegas and my practice is almost exclusively remote investors and most of my clients use either LLCs or LLCs in combination with what is called a Nevada Asset Protection Trust to protect their assets.
The structure that the attorneys I have listened to advocate the following legal structure:
Some people I know who do not even own real estate (or any assets in Nevada) use the Nevada Asset Protection Trust to protect non-real estate assets due to the security it provides. Currently, 15 other states offer similar trusts. (I will provide links to further reading later.) Once you establish the trust you create what is called a Series LLC inside the Nevada Asset Protection Trust. A series LLC is no more difficult or expensive to set up than a standard LLC but with the Series LLC you can create more LLCs (one asset per LLC) at will at no additional cost or effort. Whether the assets are located in Nevada or other states does not matter. The only catch is that you need an agent that is a resident of Nevada. I am the agent for several of my clients. Once you read about the trust, you will see that the trust agent does nothing other than receive any legal notices sent to the trust.
Another approach I occasionally hear recommended is to just get a large umbrella policy and forget LLCs or an asset trust all together. However, I have heard more than a few attorneys state that umbrella policies have the opposite effect of what is intended. One even called umbrella policies a "lawsuit magnet". As she explained it, if you go to an attorney wanting to file a lawsuit against someone, the first thing your attorney will do is contact the defendant's attorney and find out if the defendant has sufficient assets to make it worthwhile and how hard it will be to get at those assets. If your attorney sees unprotected assets (like real estate) and a large umbrella insurance policy, the attorney knows that he is going to make a lot of money in fees. However, if your attorney sees a multilayered defense like a Nevada Asset Protection Trust enclosing a Series LLC (one asset per LLC) they will know that the assets will be so hard to get at that it will not be worth the effort thus ending the lawsuit before it starts.
Below are some links for further investigation.
I hope the above helps.
you cant get an umbrella policy without having a landlord policy first.
You must be a BiggerPockets member to post on the forums
Join the world's largest, most open Real Estate Investing Community online, 100% free forever!