Sole Proprietorship over LLC?

Question

I'm new to investing but understand property management well. I plan to start my business within the next 6-8 weeks as a wholesaler and property management but I'm getting stuck on which business entity to choose for myself. From what I've read through and remember from business classes in college they have pros and cons since I would be the single owner but don't know if because it's RE, if there are specifics I should be aware of. Suggestions? Experience?

Gino Barbaro · Answer

@Hope JohnstonHi HopeAnyone who goes into business should form an LLC or incorporate. It is one of those things in life that everything is okay until something happens. You want to protect your assets so placing them into separate entities will do that for you. Most people operate under the assumption that nothing will happen to them.I think it also goes to mind set. You want to start out your business and not think of it as a small business. Start your systems and processes correctly in the beginning so when you are growing, you will have these systems set up.Gino

Hope Johnston · Answer

Thanks so much guys, this is great information and is helping me with what direction to go in.

Hope Johnston · Answer

See, this is why you post on BP before making finalized decisions ;)

Matt Moger · Answer

I agree with @Gino Barbaro. It does not really work to just dip your toe in the water. There is a lot to be said about doing it the right way from the outset. You can build quite a bit of credibility when you have the professional front that a business entity provides. Along those same lines, the tax advantages of having that structure that is not you, the individual, is invaluable.My personal preference is a Partnership LLC. A Single Member LLC or Sole Proprietorship is regarded as a "non-entity" or flow through according to the IRS. The IRS looks at it as a thin veil, because that is what most folks do that want to write off a bunch of personal stuff. They set up a single member LLC. All their deductions & all their business expenses are right there on one page to skim through quickly & determine whether it seems legit or not. One advantage of the Partnership is that the schedule K1 is separate from your individual tax return.

Greg H. · Answer

@Hope JohnstonYou have to be a licensed agent to do property management in Texas and even at that many Brokers do no allow their agents to do property management due to liability concerns

Azeez K. · Answer

@Hope JohnstonWelcome to BP! I am assuming if you plan on starting your wholesaling business in the next 6-8 weeks you are very busy networking now with several investors, real estate meetups etc and expanding your network. If you plan on doing property management (leasing and renting) Texas requires property management companies to have a real estate brokers license so please be sure to check on the state requirements. The only exception to property management is if you are salaried employee of property owners you don't need to have a real estate licenses. In regards to entity set-up it's good that you are thinking along those lines from a future growth aspect. However, I would recommend that focus on getting the sales pipeline strong and talk to other wholesalers, real estate investors, property management companies and RE professionals. In general I agree with @Aaron Montague to use the S-Corp structure. I would stay away from Sole Proprietorship because of 15.3% self employment tax...again I am no accountant/tax professional so please seek professional guidance and do your own due diligence. Again it would not hurt to get a Real Estate license as it will be an additional source of income. However, if you have a real estate licenses then there are lots of things to consider from disclosures, property management, broker approvals etc.Good Luck and much success in your new venture.

Steven Hamilton II · Answer

Unless you're an accountant or attorney I wouldn't recommend any kind of entity.I'll offer up this thread in which I posted about how LLCs can be taxed.https://www.biggerpockets.com/forums/12/topics/76052-simple-taxation-questions

Hope Johnston · Answer

I actually have been seriously considering that but not diving into being a full time realtor and using it for the extra knowledge and tax benefits it can offer. Thanks for the response! I'll look into what you mentioned about Texas in particular!

Aaron Montague · Answer

@Hope JohnstonMostly: "It depends"Check with your local statues to see if you are allowed to operate a Property Management company under the various types of entities you are looking into. Texas may be one of the states that requires you to be a licensed Property manager thus limiting your business entity options further.I recommend S-Corps if you plan on selling portions of the business.LLCs seem to be straight forward for property ownership.Sole proprietorship are the easiest as they don't require much set up. On a side note: Wholesaling is not an entry level job in the RE world. If you want to convince people to sell their property through you, go get your Realtor's license. If you've got the hustle to be a wholesaler, you've got the hustle to be a Realtor. AND you don't have to try and explain the difference to every potential customer.

Nuhan Demirkan · Answer

Hope, I wouldn't worry too much about a business entity at this point, especially if you're going to start out wholesaling. No need to add the expense. At some point in the future you may want to establish an LLC to operate under. I did not even have business cards until 8 years into landlording business. Build your adviser team, atty, title co, insurance agnt, realtor, lender, mentor. Focus on finding, negotiating, closing and assigning deals.Good luck,