LLC vs Sole Propietorship for rental business

[Mike Montanye]

How do I determine the best avenue for my real estate investing future? What is the best way to be structuring my business?

We are shopping for our first turnkey property and have a complimentary consultation on Monday to "set up our corporate structure."
I'm sure I will be getting sold the whole time on this call but want to know the best way to proceed before getting to the call.

Any insight would be appreciated.

Thanks

[Scott Matthew C.]

Hi @Mike Montanye. I was about to call it a night but found your post worth replying. 

For those who are new to real estate investing, here's a brief overview of the most frequently used business structures.

Corporations: A corporation is a legal entity that is owned by shareholders. The corporation is run by a board of directors, who are elected by the shareholders. The main advantage of a corporation is that it provides limited liability to its owners, which means that their personal assets are protected from the corporation's debts and liabilities. Corporations are also able to raise capital by selling stocks to investors.

LLCs: A Limited Liability Company (LLC) is a hybrid business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLC owners are referred to as members, and they are not personally liable for the company's debts or liabilities. LLCs are not taxed at the corporate level; instead, profits and losses pass through to the individual members' personal tax returns.

Partnerships: A partnership is a business structure in which two or more individuals or entities share ownership of a company. There are two types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners share in the profits and losses of the business and have unlimited liability for the partnership's debts and liabilities. In a limited partnership, there are two types of partners: general partners, who are responsible for managing the business and have unlimited liability, and limited partners, who invest in the business but have limited liability.

Sole Proprietorships: A sole proprietorship is the simplest business structure, and it is owned and operated by a single person. The owner is personally liable for all of the company's debts and liabilities, and they report the business's profits and losses on their personal tax return. Sole proprietorships are easy to set up and require few formalities, but they do not provide any liability protection.

@Mike Montanye based on the title of your post, I'm assuming you deciding LLC or Sole Proprietorship?

The main difference between the two is that an LLC provides personal asset protection in case of a lawsuit or financial loss. Serious business owners and real estate invesotrs usually prefer to form an LLC.

LLC vs. Sole Proprietorship Comparison

To make the right choice, it's essential to compare the following five factors:

1. Liability Protection An LLC offers liability protection, while a sole proprietorship does not. This advantage is the most significant consideration when deciding between the two options.
2. Branding An LLC can use the business's legal name as its brand name. A sole proprietorship must use the owner's surname or register and pay for a DBA name.
3. Credibility Forming an LLC can increase a business owner's credibility.
4. Pass-Through Taxation Both sole proprietors and LLCs are taxed as pass-through entities by the IRS. This means that profits pass through to members to report on their personal tax returns. All profits are only taxed once, at each member's income tax rate. LLCs offer additional tax options, such as being taxed as an S corporation, which can lead to significant savings. Sole proprietorships do not have these options.
5. Cost to Register and Maintain An LLC is a low-cost and low-maintenance business structure. A sole proprietorship with a registered "doing business as" name is comparable in price."

@Mike MontanyeI could provide more information, but it would be more helpful if you ask specific questions. I wouldn't want to ramble on and bore you with unnecessary details.

I hope this has provided some clarity and gives you the confidence to proceed with your consultation.

All the best, Mike!