Legal Structure Real Estate Investment Property Lark 1500x

Download this photo Edit with GIMP online editor

Which is the Best Legal Structure for Your Real Estate Investment Business?

When you invest in real estate, you have to remember that it is a business. If you own one piece of income property, then you may not need any sort of fancy legal structure to your business unless you really want to keep your personal assets and passive income completely separate. However, if real estate investment is your full-time job or you own multiple income-producing real estate entities, you will want to make sure that your investment business is properly structured.

The legal structure you select for your real estate investment business is extremely important. On one hand, it is designed to give you more legal protection when certain situations arise during your property ownership. At the same time, a proper legal structure will also make a significant difference when it comes to your tax liabilities and benefits.

You always have the option to manage your real estate investment venture through your personal tax returns, but this is usually not a good idea for most investors. You want to have at least some layer of protection between your personal assets and your business. If you are sued by a tenant or someone else involved in your real estate dealings, you don\u2019t want your personal assets to be at risk. Having a legal business structure and the necessary documentation in place helps provide a necessarily level of protection.

How you structure your investment business also has specific tax implications. There are pros and cons with each legal structure, so it is important to do your research and talk with your business/financial advisor, tax advisor and/or attorney to make sure and select the legal structure that is right for your investment portfolio. Every situation is different, so explore your options and make the decisions that are right for you.

Here are four of the most common legal structures that real estate investors will want to consider:

1. Limited Liability Company (LLC)

This is the most common legal structure for long-term real estate investors who purchase buy and hold properties. When you have a steady income from rentals and are also gaining from capital appreciation on the property, an LLC is usually a smart option. They are simple and inexpensive to establish with minimal paperwork. As the name would suggest, a limited liability company structure is designed to limit the liability of the investor.

In addition, LLCs are considered pass-through entities, meaning that earnings and losses run through your personal income tax return. This makes your taxes easier to manage. However, you have to be careful not to mix your business expenses with your personal expenses when itemizing deductions or your business liabilities could affect your personal assets.

2. S Corporation

An S corp is another form of a pass-through entity that also passes through your personal income tax returns of you and any other shareholders in your business. An S corp structure gives you more flexibility when it comes to management of the company and a few more tax protections, and the stock of the S corp is transferrable. Depending on the scale of your investment business (especially if more than one principal owner is involved), an S corp may be the best legal structure option for you.

3. C Corporation

A C corp is a much more complex legal structure and is worth considering if you have multiple owners. There is no cap on how many owners/principals can be involved and they operate as true corporations that pay taxes separate from any owner\u2019s personal tax returns. There is no double taxation if you decide to pull cash out. If you and other investors are pooling together resources to run a real estate investment company, then you will want to look at a C corp for your legal structure.

4. Real Estate Investment Trust (REIT)

You can also consider establishing a non-publicly traded REIT. There are certain qualification standards that need to be met (including a minimum distribution of at least 90 percent of annual income to shareholders). REITs aren\u2019t that common for average real estate investors to start, but they do make sense in certain situations. They are a good way to generate capital from multiple passive investors, but they can be hard to grow because of the income distribution requirements.

The important thing to remember is that you want to think long-term about your real estate investment goals and business plans. An LLC might be a fine short-term solution for now, but it won\u2019t be the right fit in a few years as your business and investor pool grows. Look at where you plan for your business to be in the long run and structure it accordingly.

If you are a real estate investor looking to find the best real estate properties with high investment potential, join the PropertyLark home buyers\u2019 network. Fill out the form to the right and see if you qualify.