Whether you already are a small business owner or your first rental property in the Chesapeake area will make you one, it's wise to think about the burden of taxes and liability sooner rather than later. The point of setting up a real estate tax entity is more than just to comply with the law; it's a protection that can help you to lower your overall tax burden while also creating a separation between your personal finances and the finances of your growing business.
As an expert Chesapeake property management company, Renters Warehouse Hampton Roads often handles the behind-the-scenes financial paperwork for our clients. While we aren't tax professionals by trade (and you shouldn't construe this article as tax advice), we suggest that sooner is better than later when it comes to setting up the right business entity.
Sound research can help you decide on how to structure your new business in a way that maximizes the benefits that matter to you.
While, of course, it is rare, the possibility of being involved in a lawsuit makes it advisable to know what part of your assets are specifically for the business of real estate investing and which part is your personal assets (or a salary you are paying yourself for your work). Depending on the size and scope of your business, you may benefit from different kinds of real estate entities that we'll explore in a bit more detail today.
Sole Proprietorship with Separate Finances
Many real estate owners with only one rental property in the Chesapeake rental market may choose to become a sole proprietorship, claiming their income on their taxes without filing separate business returns.
- These sole proprietors often seek out inexpensive liability insurance to protect them in the case of lawsuits.
- They are very careful to separate business finances from the personal finances in their accounting.
- By making these arrangements, they set themselves up for a fairly low-risk approach to real estate investing—especially when they aren't working with multiple renters at a time.
Sole proprietorships share a lot in common with LLCs, but there are a few extra steps and benefits to a Limited Liability Corporation, as well as some establishment and maintenance costs. Avoiding these costs and the additional work of maintaining the LLC is the main reason some investors with very few properties (or only one) might simply file as sole proprietors.
However, for most real estate companies that hope to continue growing over time, it is worthwhile to learn about LLCs and corporations. After all, even if you are a small company now, setting your real estate business entity can help you prepare.
Don't be afraid to talk with your Chesapeake property management company about this decision. At Renters Warehouse Hampton Roads, we help so many investors on their path to financial freedom through Rent Estate™ that we're able to provide unique insight based on the goal you have for your portfolio.
LLCs, S Corps, and More: Valuable Entities for a Growing Portfolio
As you grow your portfolio, the advantages of establishing an LLC for your business holdings grow relative to the work and costs of establishing the LLC. There are also cases where you might want a separate LLC for different properties within your portfolio, resulting in added expenses.
- S Corps and C Corps are businesses that must file a separate tax return for the business, and they are beholden to their shareholders and come with a variety of additional requirements as well as benefits to the owner.
- They can have restrictions on what percentage of the business income can be from passive activities like real estate investment.
- This makes learning from someone who knows a lot about your own real estate and business circumstances and who knows the legalities of these entities necessary.
- Whether you want to stick with LLCs or learn more about corporations, such as C Corps and S Corps, has a lot to do with your other sources of income and the relative tax burdens created in each of these entities.
A good rule of thumb is to make sure you have an LLC or liability insurance for protection to begin with, but to then talk to your accountant or full-service property management company about the potential advantages of additional entities or new entities for your particular circumstances.
Every real estate investor has different influences from the rest of their lives (such as other businesses or jobs) that make their circumstances unique.
Work With a Local Attorney to Learn Benefits
- If you want to make sure you're well covered before you start doing business as a rental property owner, contact a local attorney who has worked with real estate investors before.
- They'll have some insight into any local regulations or laws that may require you to register your business or acquire additional permits, as well as some idea of whether a sole proprietorship, an LLC, or an S Corp would give you the most benefits.
- Once you've worked with your attorney to verify what will be best for you, they are often a great resource in filing any necessary paperwork to establish your business entity.
- You'll then want to talk to your Chesapeake property management company about how you want your accounting handled.
We mentioned before that at Renters Warehouse Hampton Roads, we offer services like rent collection and financial reporting. With the help of accountants and attorneys, as well as your trusted property manager, you can protect your investments while also keeping your personal assets safe.
One way you can begin taking advantage of our experience immediately is by downloading your FREE copy of our portfolio-growing resource! It's full of key insights to help protect your developing real estate portfolio—and your income.
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