Property management is an exciting business. You get to work within properties every day, and if you are passionate about real estate, you will have an even better time taking care of properties on behalf of your clients. But, before you can get into this industry, you must register your business. What is the best entity to use for your property management business? Well, there are many different options available for you to choose from and each one has its own pros and cons. Here are a few of the best options, according to Chesapeake property management professionals.
C corporation
The C corporation is a popular entity for many new businesses. In a c corporation, you own shares of the corporation. This has a few legal drawbacks. For instance, if someone were to sue you personally, they could attack your shares in the corporation and get assets from your corporation. This is a drawback of a C corporation as compared to an LLC, in which all the party that is suing you would get is a charging order. The effects of that order vary depending on the state you live in.
A C corporation is expensive to file; you need articles of incorporation, bylaws, and you must make regular filings with the state, which means you’ll have to hire an attorney to help you with that. The benefit is that you do get limited liability, so if someone sued your business, they would sue the corporation and not you in particular.
Corporation
Did you incur a bunch of expenses when starting your Chesapeake property management business? If you want to write those expenses off and deduct them come tax time, you want to go with a traditional corporation. That’s because this the only entity that allows you to benefit from section 1244 of the Internal Revenue Code.
A 1244 stock loss treatment means that should you find that property investing and management is not working out anymore, then you can deduct the money that you have invested in this company in the year that you shut down your company. So, it gives you an additional way out.
Sole proprietorship
The great thing about a sole proprietorship is that it is informal. You do not need to file anything with the state. It's less expensive to create, and you do not need any operating agreements or by-laws. You just run your business and keep track of your income and expenses.
On the downside, you will have to pay self-employment taxes on your earnings, and you could be exposed to liability. So, for instance, if a renter injures themselves in one of your properties, you’ll be personally liable, especially if you have significant assets. Your assets can be taken if you were to be sued or someone gets a judgment against you.
Land Trust
The land trust is a great entity to hold your Chesapeake property management business if you do not want to pay a lot of tax. The land trust offers privacy because you can opt to keep your name out of the deed. This means that it separates legal ownership from the beneficial interest. With a land trust, legal title does not mean that you are liable for the things that occur on the property, and the ability to rent it out is actually separated from the legal ownership.
On the downside, a land trust does not provide asset protection and is only a title vehicle where you are separating legal ownership (what’s on the title) from beneficial ownership. What you can do is assign the beneficial interest to an LLC. That way, if something happens to the property, the land trust is held accountable, providing you complete anonymity.
LLC
LLC stands for limited liability company. LLCs are great for holding rental real estate or flipping properties as well as a property management company. An LLC provides you with limited liability protection, so if someone were to sue your property management firm, you would be protected personally. Also, if someone were to sue you personally, they would not be able to get into the business's assets.
The best way to explain how an LLC benefits you is that it puts a box around the real estate you are managing so that if something happens to the property, it does not contaminate everything else. It is similar to how you put your toiletry items in a separate bag when traveling so that if the perfume, cologne, or toothpaste explodes, it doesn’t contaminate your clothes. The same goes for what an LLC does for your real estate. There’s a nice tax benefit to operating an LLC as well, and as you'll soon learn, certain tax advantages can help you get the most of your business.
To learn more about protecting your rental properties, and your business, download our free guide today!
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