If you are planning to structure your business as a real estate investor you have a few options and they might seem confusing at first.
Defining your business structure is one of the most important decisions that you are going to make. That is why it should not be taken lightly.
The decision you make will define the laws that govern you and the taxes you will need to report. That is why it is important to consider your specific situation and context when choosing the right one.
Each structure has its own advantages and disadvantages that we will try to cover in this article.
- Sole proprietorship
When you are first starting with your company you fall into this category automatically until you decide on other structures.
In this way, you are doing business under your own name, not your business name and this is important to consider because your personal assets will be mixed with your business assets.
The big disadvantage here is that if for any reason someone sues you, this person can come after your personal assets AND your business assets.
The big advantage is that you own your business assets and it is the most simple and cheap way to go.
There is not much you need to do to become a sole proprietorship because as mentioned before, you will fall into this category automatically.
This is a good choice for someone that is making a profit from a passion or hobby that they do not consider their main business.
Another important thing to consider here is that you will not need to file your taxes in a separate way because your business will be mixed with your personal assets. You will just pay an additional self-employment tax on the income from your business.
After your business starts generating more revenue you will want to move to a better structure, where you and your personal assets are more protected. A Limited Liability Company is the best upgrade you can do after working as a sole proprietorship.
Why is it more protected? Well, in this case, anything that belongs to you as a person will be protected if someone decides to sue your company for any reason. Of course, there are some exceptions but in general, you can say that you are protected.
It’s important to mention that an LLC has a cost and that cost will depend on your state and whether you want to do this process on your own or want to hire some kind of legal service to do it for you.
For the taxes, an LLC is not apart from the owners. The LLC profits and losses are passed to the LLC members. This means that when members report the business income and expenses, they need to do it on their personal returns.
- S Corp
From the three structures, an S Corp is the most expensive and the most difficult to create.
It has tax advantages because S Corps do not have to pay taxes for all the revenue of their business. You only pay for the salary you decide to give yourself. Any additional income is treated as a distribution, which is taxed at a lower rate.
Your salary needs to be reasonable for the work you do but still, it is a great choice if you want to save taxes. In this kind of structure, your personal assets and savings are also protected.
- LLC taxed as an S Corp
There is another option to structure your business that can work as the combination of an LLC and an S Corp. You will have the liability and low cost of LLC, with the tax advantages of an S Corp.
This normally happens when someone has an LLC but starts making much more money.
What is the best business structure for you?
If you are working as a real estate investor, the sole proprietorship might not be the best idea for you. Your business is not necessarily a hobby that you do occasionally. Also, your personal assets and savings are not protected.
In addition, you will be paying the self-employment tax without being protected.
On the other hand, you have the LLC. This one has a minimal cost and the main advantage is that you are protected, but you will still have to pay taxes for your entire income.
Next, you have the S Corp that works great when you are bringing in a decent amount of money. This type of structure will allow you to save a considerable amount of taxes depending on your salary.
And lastly, you have the LLC taxed as an S Corp, which can be the best option for a real estate investor that is generating a high revenue. You get the benefits of protecting your personal assets and the benefit of saving money in taxes.
If you are in the process of changing your structure or understanding how your accounting and tax process is going to work in your new structure, we can help you.
At Terra Business Solutions we will give you the expert advice you need in this kind of decision.
If this is something you think might help you, you can schedule a call with us.
Without any commitment, we can hear your needs and identify if we can help you reach your financial goals with the right business structure.
Are you interested? Click here to get a call with our experts.
I hope this was helpful for you and that as a real estate investor you have been able to find the answers you need for your business structure. Talk to you soon.