If you're considering legitimizing your real estate investment projects into a business, one of the first steps is selecting the best business entity or business structure. The structure of your business should be based on research and careful consideration of a variety of factors. Some of the most common factors you should consider concerning your real estate business structure include:
- How you plan on structuring your investment company
- Any liability concerns
- The number of people who will own your business
- Tax benefits of each structure
- The amount of time and effort you're looking to spend on the overarching business
In the end, you may have countless questions, such as whether you should choose a real estate LLC vs sole proprietorship vs every other type of business. Fortunately, you don't have to do it alone! The experts at MB Group offer comprehensive business consulting to help you choose the best business structure for success. Let's take a closer look at the different types of business structure entities.
Real Estate LLC for Long Term Investors
For most people looking to execute a "buy-and-hold" strategy, forming a real estate LLC is the best business structure. The buy-and-hold strategy is ideal for business owners looking for long-term capital appreciation and to accrue steady income. At the same time, real estate LLCs are relatively easy and cheap to start while requiring minimal paperwork. When it comes to comparing the LLC vs. sole proprietorship, the limited liability company limits your legal exposure as an investor, which makes it an especially attractive feature.
Another exceptional benefit of an LLC is its pass-through capabilities. With pass-through entities, all losses and earnings are passed through to you, so you can file gains or losses on your individual income tax returns, which makes things exceptionally easy to manage.
If you do decide to go with this business structure, you mustn't mix business and pleasure! When you do mix business and personal, you can shatter your corporate shield of protection and open the door to being personally liable.
Real Estate S-Corp for Short Term Flippers
While real estate LLCs may be ideal for long-term buyers, S-Corps are more suitable for short-term investors or flippers. When you flip property, it's considered inventory and you are considered a dealer. And when you're a real estate dealer, you aren't able to take advantage of certain tax benefits that are offered to long-term buy-and-hold investors, such as:
- Deductions for depreciation
- The capital gain tax rate
- Code Section 1031 tax-free like-kind exchange
- Installment sales method for recognizing gains
If you're a flipper, you'll be best suited to create an S-corporation to avoid social security/self-employment tax on a percentage of your profits earned from sales.
Real Estate Limited Partnerships
Another very attractive entity for real estate business owners is a limited partnership. The general partners are typically tasked with managing the investment while the limited partners are responsible for the capital invested into the business. In other words, the investors invest money into the business while the general partners manage the day-to-day tasks associated with it. Real estate limited partnerships can pass through tax losses, offer ample flexibility in allocating losses and gains among partners, and provide greater diversification.
Contact the Business Consulting Team at MB Group
Determining how to structure your real estate business is an important decision. With so much weighing on your decision, it's important to speak to the experienced CPAs at MB Group. We can review your holistic financial situation and provide insight into which business structure would be most beneficial. Contact the MB Group today for business consulting.