Should I Create a Business Entity for My Real Estate Investing Business?
The focus of your real estate investing business should be marketing and finding houses to buy. However, as your business grows, you can establish a business entity like a Limited Liability Company (LLC) to use when you purchase investment properties.
For the first few deals, it isn’t a necessity, but at some point forming a business entity is something you should consider.
What is a Business Entity?
A business entity is when you start an organization separate from yourself for legal and tax purposes. As a real estate investor your investments would be in the business’s name instead of your own. Ultimately, it shields your personal assets from business liabilities. The most common type I recommend to my students is an LLC.
Limited Liability Corporation (LLC)
An LLC is a business entity formed to own and operate a business. As a real estate investor, it protects you from being personally liable for debts. As an LLC you will claim the profits and losses of your business on your personal income taxes.You can also deduct pre-tax business-related expenses.
Pros and Cons of Forming an LLC?
There are pros and cons to forming an LLC. It depends on your personal situation. If you are unsure, it is best to meet with a tax advisor to help you decide if it is the right decision for you.
Benefits of an LLC
- Brings credibility to your business because you have a legal business name.
- Adds a layer of anonymity to the properties you are investing in.
- Your personal assets are usually protected from business liabilities.
- The pass-through taxation to your personal taxes is more simple than with other types of corporations.
Drawbacks of an LLC
- There is a cost to form the LLC, and in some states there is an annual fee to keep the LLC active.
- While the LLC shields your risk from business liabilities substantially, it isn’t a total protection.
- If you need to get financing for a property, it can be more difficult with an LLC.
How Do I Create an LLC?
Each state has a different process for forming an LLC. To find your state’s information you can contact the Secretary of State’s office or website.
Forming a business entity like an LLC is mainly for asset protection as a real estate investor. It is not essential when you are early in your real estate investing ventures.
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