Once prepared, the document can be submitted by mail or in person with a filing fee. Create an Operating Agreement: An LLC Operating Agreement is not formally filed with the state, but should document how the business will be organized and run internally. This may include the method of choosing managers, rights and duties of members, and how profits or losses are distributed.
Publish your intent to file: Although required only by a few states, find out whether or not you are required to publish an intent to file through your local newspaper. Otherwise, your LLC is considered officially formed once your Article of Organization are accepted and approved by your Secretary of State.
Obtain required licenses and permits: Once your business has officially been set up, you can take your process a step further by obtaining any businesses licenses and permits that might be required. In addition, do not forget to apply for a tax identification number through the IRS for your new business.
Business owners are aware of the vast amount of legal entities they may structure their companies under. An LLC for real estate investment, while more recognizable than the average legal entity, is but one of several options. In fact, due to their recognizable nature, most business owners choose the structure of an LLC because they are unfamiliar with the many legal nuances associated with other options.
Others simply assume LLCs are the best way to go. In reality, there is not one entity that encompasses, or covers the needs of every business.
While most real estate investors favor LLCs, there are other options available. Corporations and partnerships, while different in their own right, share many similarities. The following is a breakdown of other legal entities:. A corporation stands alone as its own legal entity, and protect their owners from personal liability for corporate debts and obligations. By default, corporations are taxed on multiple levels corporate tax and income tax.
The advantages of a C Corporation are as follows:. Corporations transcend the life of their owners. Despite the loss of an owner, the corporation will continue to exist. An S Corporation is created under state law, much like the C Corporation. However, unlike a C Corporation, it elects to be treated as a pass-through entity for tax purposes.
Moreover, S Corporations are not subjected to double taxation because of the nature of a pass-through entity. The advantages of an S Corporation are as follows:. While not officially considered to be a separate legal entity, a sole proprietorship is the simplest form of business. In fact, by default, once you start a small business, you become a sole proprietorship. Having said that, there is no separation between the business and the individual—the two are synonymous. The advantages of a sole proprietorship are as follows:.
Rightly so; just because holding companies offer a multitude of benefits to real estate investors and their particular industry, does not mean they are the right choice for every investor. Keep in mind that the field of real estate investing is incredibly diverse, and it would be nearly impossible to find one legal entity that protected every business. Having said that, many investors believe the threat of a theoretical lawsuit does not warrant the commitment required to start an LLC.
Those of this school of thought may be more inclined to inquire about affordable liability insurance. Having said that, entrepreneurs that rely solely on insurance as a means of protection take on ill-advised risks. It is not uncommon for the average liability insurance policy to have limitations, exceptions and addendums that convolute coverage. Simple put: liability insurance does not cover all your corners. While the chances of a lawsuit being filed that exceed the limitations of your policy are remote, they are by no means impossible.
Of particular concern, however, are the devastating effects that can result from a lawsuit that is not covered by your policy. On the off chance your policy does not cover a situation, the consequences can be detrimental. While they may require more effort on your part, there is no denying the positive impact they can have on a business.
They provide a lot more protection for business owners than liability insurance. But the real benefit is the peace of mind.
Why Start A Real Estate Investment Company?
Investors can sleep comfortably knowing they are safe. Now that you have set up your company, you may be wondering what to do next. The steps outlined above are mechanisms that will help protect your business in more ways than you could possibly imagine. When applying for your EIN, you will need to provide the type of entity you are starting, as well as the date it was founded.
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Obtaining an EIN is required by the IRS, and will allow your LLC to open a business bank account, protect against identity theft, and build credibility as a sustainable business. Not unlike the federal tax ID, applying for a business license or permit is not associated with the same process of forming an LLC. That means you will need to remain diligent in your efforts to run a legitimate business and file for a business license or permit on your own accord.
Consequently, there is a fine for operating a business without them. To help clear things up, SBA. To be certain, however, be sure to contact your local municipality and follow their recommendations. If you have already formed an LLC, you are required to open a separate account.
In doing so, you separate your personal finances from your business finances, something that can go a long way in asset protection. Simple as it may be, diversification is a viable protection strategy. In the same vein as opening a separate bank account, newly acquainted LLC owners will want to apply for a company credit card. Having a company credit card essentially eliminates the possibility of record-keeping confusion and placing all of your eggs in one basket. As a real estate investor, you should be aware that your particular industry is prone to risk.
Without sounding too negative, there is simply no way to eliminate all risk associated with starting a real estate investment company.
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However, with the right education and legal designation, you can effectively mitigate a great deal of risk. Accordingly, complying with the formalities set forth by an LLC will protect your business from a great deal of threats. After having gone over the basics, you now are equipped with an understanding of the benefits of starting a real estate holding company, how they compare to other legal entities, as well as the difference between an LLC and liability insurance and which option is best for your business. Do you have any secret information about forming a real estate holding company?
Share your insights below. Key Takeaways A real estate holding company helps reduce the risks and liabilities associated with a real estate investing business. The benefits of a real estate holding company include the limitation of personal liability and pass-through taxation. Investors should seek to understand how a holding company compares to other legal entities.
Do Holding Companies Pay Taxes? Holding Company Structure Generally speaking, the structure of a holding company will look something like this: the holding company or LLC is at the top and individual subsidiaries exist underneath it. Real Estate Holding Company Example An example real estate holding company may help illustrate what this business structure would actually look like. A holding company prevents double taxation on investment properties.
The business structure allows investors to more easily manage their properties. As a whole, LLCs pay less fees when compared to corporations. Holding companies provide investors with more flexibility to distribute their profits. Real estate investment company enables investors to purchase properties in the U. A holding company is more easily transferrable than other entity types. Limits Personal Vulnerability Investing in real estate is a rather lucrative career choice. Pass-Through Taxation Assuming liability coverage is the most important factor of forming a real estate holding company, taxes are a close second.
Additional LLC Benefits Real estate holding companies came to prominence approximately 10 years ago, as real estate investors were made privy to the upsides they offer. Those perks include, but are not limited to the following: Ease Of Management: The structure presented by an LLC makes delegating management responsibilities and positions a lot easier. Real Estate Holding Company Vs Other Legal Entities Business owners are aware of the vast amount of legal entities they may structure their companies under.
The following is a breakdown of other legal entities: C Corporation A corporation stands alone as its own legal entity, and protect their owners from personal liability for corporate debts and obligations. The advantages of a C Corporation are as follows: Owners are only personally liable up to the amount invested in the corporation. Owners have the option of either participating as a manager or solely as a passive investor. There is no limit on the amount of shareholders a corporation can have at a given time.
The transfer of ownership is relatively easy. All an owner has to do is sell their shares. The advantages of an S Corporation are as follows: S Corporations are privy to many of the same benefits exercised by C Corporations. We want to help you understand if startup investing is suitable for you.
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