How do you have your business set up?

[Jake Thompson]

Okay, first let me start off with saying I understand that I should get an attorney and CPA to consult with regarding any legal/tax issues. With that being said, I'm curious how others structure their real estate business. What I mean by that is, have you set up an entity strictly for your acquisition business? I know people talk about setting up LLC's for every property, or some properties in one LLC and maybe a large apartment in it's own LLC. But that's not what I'm asking about, I'm curious about if/how you structure your actual business, not the properties that business owns. I hope this makes sense, if not please let me know and I'll try to rephrase. Thank you ahead of time!

[Bret Allen]

LLC, S Corp, C Corp, LLP, LP, Family Limited Partnership, Partnership, Land Trust, Irrevocable Grantor Trust, or simply insurance??? There are a lot of questions when it comes to setting up the proper structure and there is no silver bullet. Your business structure needs to take into consideration tax consequences, risk tolerance, total assets, type of investing, short term goals, long term goals, anonymity, partners, raising money now or in the future, borrowing money, etc.

You also need to consider maintenance of your business, think corporate governance, adequate funding of the business, tax returns, operating agreements, resolutions, authority, etc. 

Also, don't overlook the fact that those starting out with a low net worth may be fine holding investments in their own name, or a d/b/a, and simply buying extra insurance (think an inexpensive umbrella policy) to cover potential liability risks.  The cost of setting up and maintaining a new entity may not be worth the trouble for a property or two (assuming you have no other money in your name).  

Many states, including Texas, allows slightly more complicated structures such as Series LLC. These can be great tools if you understand how to use them. One downside to Series LLC is that not all other states will recognize the series structure. So if you invest in another state with a "series" from your Delaware of Texas Series LLC then you might lose some of the protections that you thought you had. Also, an accountant should be consulted regarding whether you need to seek separate EIN numbers and/or file tax returns for each series -- you will get different opinions on this point depending on who you ask.

LLC, S Corps, C Corps are all treated slightly different under the tax code. The IRS is one creditor that you don't want to mess with. My suggestion here is to pay your taxes and to pay them correctly. There are many tax benefits that come along with real estate investing, but there are some pitfalls. Be smart and consult with an expert.

More complicated structures will include asset protection and anonymity features.  These structures are essential for active and successful investors, but might not be worth the hype for those just starting out.  Shielding and separating your assets from the risks of a deal can be valuable.

In summary -- you can make your business as simple (dba and insurance) or complicated (Family limited partnership with LLC general partner owned by a irrevocable family trust for you children) as you like or need. There is no easy answer for what you might need. A good attorney and CPA that will educate you on your options and not pressure you to use something you don't need is valuable member of your team.

My suggestion is that what ever you use/create, you need to understand how it works and how to maintain it.  If you don't understand it, don't use it.  Or hire someone to explain it to you or to help you maintain it.  

Good luck and good investing!