Type I business? SP or LLC

[Colin Murphy]

When just starting out as a REI business, how should you structure your company? Sole proprietorship (with enhance liability insurance) or LLC. If you and your spouse are running the business together, is this a partnership? Or is it better to put the business under one name and keep personal assets under the other name?

[Roy N.]

@Colin Murphy

Welcome to BP.

While it is probably premature to create a holding company for your future properties at this point, it is good you are thinking about it now.

A Limited Liability Corporation (LLC) is an entity which straddles the worlds of sole proprietorship and the corporation. It is also an entity which does not exist in Canada, so is not an option for you if you plan to operate at home.

While there are advantages to forming a corporation, there are many disadvantages to forming one early depending on your personal situation.   As an example, real estate is deemed a passive investment (unless you are flipping), as such company for the purpose of holding real estate will not enjoy the CCPC small business tax rate, but will have its income taxed in the highest marginal tax bracket.  Unless you are personally in this bracket, it may be best to have the income taxed in your own hands.

A company brings with it additional reporting and tax filing obligations as well.

When it comes to working with your wife, you could formalize things with a partnership agreement (though you did that when you married) or you just could purchase properties in both your names - as either join tenants (the default) or tenants in common. An alternative thing to consider, if you both have strong incomes, you may want to determine if your borrowing ability (number of mortgages) would be greater if you purchased, and mortgages, properties individually (some in your name, some in your wife's name).

Since you are thinking about this all upfront, this would be a good time to sit down with your wife and lay out a roadmap of your near, mid, and long term real estate goals and then meet with an accountant and attorney who specialize in real estate to determine what ownership structure best fits your initial needs and how/when you would move towards more structured (i.e. corporations or trusts) ownership and how to minimize your tax situation in the process.

As part of your self-education, I would recommend picking up a copy of Steven Cohen and George Dube's "Legal, Tax and Accounting Strategies for the Canadian Real Estate Investor" It will be a good primer on the subject.