How Do Real Estate Investors Structure Their Businesses?

Owning investment properties is often exciting and lucrative. However, investments in real estate, whether vacation rentals, long-term rentals, or properties for resale, can also create liabilities. Those liabilities make it critical for real estate investors to wisely choose how they will structure their businesses.

Choosing a legal entity for your real estate investment business is an important decision that has both legal and tax consequences. Successful real estate investors are not just skilled at spotting a good investment they are knowledgeable and savvy about all aspects of their business, including the way it is legally organized.

Some business structures, such as Sole Proprietorships and General Partnerships, leave property owners personally responsible if someone sues for damages caused at a property. Other business entity types offer some level of personal liability protection. Without personal liability protection, a property owner’s personal bank accounts, stock, home, and other investment properties may become vulnerable to cover legal costs and settlements.

ENTITY OPTIONS

Limited Liability Company

A limited liability company (LLC) is a legal business entity that merges the advantages of a corporation with those of a partnership or sole proprietorship. It is a favored option for small businesses and real estate ventures due to its adaptability and tax advantages.

A key benefit of an LLC lies in its provision of limited liability protection for its members, especially when there's more than one owner involved. This shielding typically safeguards personal assets from business debts and legal obligations.

To make the most of this liability protection many investors use multiple LLCs - keeping rental property assets legally separated.

A series LLC refers to an umbrella or master LLC with separate LLCs for each property structured beneath it. While there’s just one Articles of Organization required to form a series LLC, each LLC in the series operates as a separate entity. Each LLC in the series has its own business name, establishes its own bank accounts, and maintains its own records. The individual series’ assets, liabilities, operations, and membership interests are independent of other series under the umbrella LLC.

Another structure that real estate investors might choose is a Limited Partnership (LP). Real estate investors who seek outside investments from people or companies that do not wish to run the business may find this an attractive option.

Limited Partnerships

Limited Partnerships (LP) often come into play when investors want a more casual involvement in the day to day managing and operations, offering an accessible route for laypeople to reap the potential rewards of real estate investment without managing the details.

LPs typically consist of two roles: general partners and limited partners.

General partners are the individuals or entities responsible for managing the day-to-day operations of the company. A general partner makes key decisions about where to invest, manages those properties and decides the right time to sell. However, they have unlimited liability, which means they are personally responsible for the entity’s debts and obligations.

Meanwhile, limited partners are passive investors. They provide capital to the partnership but have limited involvement in its daily operations. Their liability is typically limited to the amount of money they’ve invested in the partnership. Profits or losses from these ventures are then divided among all partners based on their investment share.

KEY CONSIDERATIONS TO BEGIN THE PROCESS

1. Transferring an Existing Property Deed to the Business Entity

After forming a business entity, the investor needs to sign a deed (usually quit claim deed) transferring the property to the business. Also, the deed must be recorded with the county where the property is located. Failure to do this may mean that the investor will legally remain the property owner personally—and, therefore, be the defendant in any lawsuit associated with it.

2. Insuring the Property Under the Business Entity

To protect property from liability and damage, investors should consider a comprehensive landlord’s property insurance policy in the business name. It’s critical to have written proof showing the business name as the entity insured, so the insurance company won’t have reason to deny coverage in the event of a claim. Investors who have registered separate entities for individual properties would likely need separate coverage for each one.

3. Keep the Business Entity in State Compliance

Investors not maintaining their business entities as required can put their personal assets at risk in a lawsuit against the business. Noncompliance pokes a hole through a business’s corporate veil, the protective shield that maintains legal separation between a business entity and its owners. Different states have different requirements. Regardless of where a business entity is located, real estate investors should keep their personal funds separate from those of their companies.

If you are considering becoming a real estate investor or already own real estate property and have questions concerning this topic, please reach out to the attorneys at Lavelle Law at 847-705-7555, or email Attorney Eso Akunne at eakunne@lavellelaw.com to schedule your free and confidential consultation.