What is the Right Entity for Your Real Estate Investment?
Once you have decided that real estate investment is right for you, you next have to determine which type of entity is best suited to you and your business. Generally speaking, there are three types of entities that are typically associated with real estate: Limited Liability Company, Limited Partnership and S Corporation. Here is a closer look at what each of these entities has to offer.
Limited Liability Company
A Limited Liability Company, or LLC, is the least complex of the various types of business structures. Becoming an LLC provides you with legal protection for your personal assets while also allowing you to avoid double taxation. For long-term investors who plan to buy and hold their investments, forming an LLC is typically the best option. This is because buy and hold investing typically focuses on obtaining rental income and gaining long-term capital appreciation. Furthermore, since most states do not consider the ownership of real estate to be a business transaction, you do not have to register as a foreign LLC in the state where the real estate is located.
A Limited Partnership, or LP, is created when two or more partners run a business together. With a Limited Partnership, each of the partners is liable only to the amount that each has invested. While limited partners do not receive dividends, they do have direct access to the flow of income created by the business.
Forming a Limited Partnership can be costly, but this business structure can potentially offer some estate planning benefits. Many of the benefits associated with a Limited Partnership can also be achieved by forming an LLC and issuing nonvoting units with restrictions. If you do decide to form a Limited Partnership, you should be sure to also form a separate entity to be the general partner in order to avoid personal liability.
Forming an S Corporation is a good option for short-term investors, or those who buy and sell, Therefore, if you are interested in flipping real estate for a quick profit, an S Corporation entity may be a good fit for you.
An S Corporation, or S Corp for short, is basically a lighter version of the C Corporation entity. Unlike a C Corp, an S Corp only has to file taxes once per year and is not subject to double taxation. On the other hand, an S Corp does offer investment opportunities, protection of limited liability and a perpetual existence.
An S Corp is a good formation for buy and sell investors because real estate purchased for the purpose of flipping is considered inventory. This means you cannot benefit from the same tax benefits as a long-term real estate investor, such as capital gain tax rates, depreciation deductions and the 1031 exchange. Forming an S Corp allows you to avoid self-employment taxes on a portion of the profits that you earn from flipping real estate.
If you are unsure of the entity that is right for you or if you simply need some guidance and assistance with helping your real estate investments become as profitable as possible, contact Ankor Management today!