As a real estate investor, you know that your business is only as successful as the systems you have in place to manage it. Having well-defined systems helps you operate more efficiently; stay organized, and most importantly, make more money.
One of the most important systems in your business is your organizational structure. Your organizational structure defines how your business is legally set up and how it operates on a day-to-day basis.
There are several different ways to structure your real estate investment business, and the best structure for you will depend on a number of factors, including the size and scope of your business, your goals, and your personal preferences.
In this article, Tommy Shek gives you an overview of the most common real estate investment business structures and helps you decide which one is right for you.
Sole Proprietorship
A sole proprietorship is the simplest and most common structure for a real estate investment business. If you’re a one-person operation, then this is probably the way to go.
The biggest advantage of a sole proprietorship is that it’s easy to set up and manage. There are no complicated legal forms to file or fees to pay. You can also deduct all of your business expenses on your personal tax return.
The downside of a sole proprietorship is that you’re personally liable for all debts and obligations of the business. This means that if your business fails, you could lose your personal assets, like your house or your savings.
Partnership
Tommy Shek says if you’re going into business with one or more partners, then you’ll want to set up a partnership. There are two types of partnerships: general partnerships and limited partnerships.
A general partnership is similar to a sole proprietorship in that the partners are personally liable for all debts and obligations of the business. A limited partnership is a bit different in that there is at least one partner who is not personally liable for the debts and obligations of the business; this partner is known as a “limited partner.”
The biggest advantage of a partnership is that it allows you to pool resources with other investors, which can help you get started in real estate investing more quickly and with less personal risk.
The downside of a partnership is that you’ll have to split profits with your partners, and you’ll also be jointly liable for the debts and obligations of the business. This means that if one partner mismanages the business, it could potentially ruin the business for everyone.
Corporation
According to Tom Shek, A corporation is a legal entity that is separate from its owners, which are known as “shareholders.” A corporation can be either publicly traded on a stock exchange or privately owned.
The biggest advantage of a corporation is that it limits the liability of its shareholders. This means that if the corporation fails, the shareholders will not lose any of their personal assets.
The downside of a corporation is that it can be more difficult and expensive to set up and operate than a sole proprietorship or partnership. You’ll also have to pay corporate taxes on the profits of the business.
Limited Liability Company (LLC)
A limited liability company (LLC) is a legal entity that is separate from its owners, which are known as “members.” An LLC can be either publicly traded on a stock exchange or privately owned.
The biggest advantage of an LLC is that it limits the liability of its members. This means that if the LLC fails, the members will not lose any of their personal assets.
The downside of an LLC is that it can be more difficult and expensive to set up and operate than a sole proprietorship or partnership. You’ll also have to pay corporate taxes on the profits of the business.
Real Estate Investment Trust (REIT)
A real estate investment trust (REIT) is a legal entity that is separate from its shareholders. A REIT can be either publicly traded on a stock exchange or privately owned.
The biggest advantage of a REIT is that it limits the liability of its shareholders. This means that if the REIT fails, the shareholders will not lose any of their personal assets.
The downside of a REIT is that it can be more difficult and expensive to set up and operate than a sole proprietorship or partnership. You’ll also have to pay corporate taxes on the profits of the business.
Conclusion
There are a few different business structures that you can choose from when you’re starting a real estate investing business. The best structure for your business will depend on a number of factors, including the size and scope of your business, the amount of personal liability you’re willing to take on, and the amount of money you have to invest. If you’re not sure which structure is right for you, it’s a good idea to talk to a lawyer or accountant who can help you make the best decision for your business.
