If you are unsure which type of real estate entity you should establish for yourself, you are not alone. The options can be confusing, and your choice is crucial to protecting yourself as a rental property owner.
- Forming an entity will mitigate the risk involved in running your business.
- The various entities you can select from will also affect the way that both you and your business do your taxes.
- This can be beneficial to you in many ways—namely saving yourself money!
- Due to the number of options you have when creating your real estate entity, you should consider them carefully before deciding which one to utilize.
With that in mind, what are some of the more popular options that property owners turn to? Here are several that we’ve seen investors of various sizes use over the years.
Quick note: This blog is not legal counsel. If you need real-time assistance, reach out to our team at San Antonio Property Management or a skilled attorney.
A Limited Liability Company
- A Limited Liability Company (LLC) is the most common entity for investment property owners in the San Antonio rental market who retain their property for long periods.
- This entity will protect the assets of the owner against any debts or lawsuits which may occur.
- If your investment property business should incur any legal fees or debts, you will not be held personally accountable for such debts—only your company will be responsible.
- This ability to shield your assets is an attractive benefit of the limited liability company.
You will also have the benefit of pass-through taxes, meaning there will be no corporate tax return—and only the owner will report profit and loss on their tax return. Thus, a Limited Liability Company protects you from accidental ‘double taxation’ that can occur through other methods.
S Corporation
- The best entity for the investment property owner who buys and sells properties quickly is the S Corporation.
- With an S Corporation, you will be considered the dealer of an ‘inventory’ that is comprised of your investment properties.
- This is similar to if you were to be a car salesperson, but for real estate. You would have an inventory of ‘product,’ which you would be selling to the consumer.
- This type of entity will protect the owner from accruing unwanted tax burdens throughout the year due to being classified as self-employed.
As a San Antonio property management company, we know that an S Corporation is less likely to benefit you if your intent is a buy-and-hold strategy. However, if your focus is on fix-and-flip investing, this can be an ideal option.
Sole Proprietorship
- The sole proprietorship is simple in that the owner only needs to register their name and obtain local licenses to establish the entity.
- This can be appealing to many San Antonio investment property owners, and some eventually decide to go this route.
- However, it is important to note that a sole proprietorship does not protect the ownerfrom any business-related debts which may accrue.
For example, if the company is sued for any reason, not only is the business liable—the owner’s assets can be brought into the lawsuit.
When considering a sole proprietorship, tread carefully: it does not offer the same protection that other entities can give you.
Before You Decide, Consult an Attorney!
- Laws vary, and the best thing to do before deciding on your real estate entity is to consult an attorney—especially if you intend to expand out of state.
- Your local attorney will be able to navigate the legalities of creating and maintaining a business entity.
- Though you may think you know which route to go, it is always best to get the opinion of an expert before making a decision that can affect your business.
Be safe and get the help you need to make the right decision: the money spent speaking with a local attorney may save your business money in the future!
The Decision Is Yours—but It Doesn’t Have to Be Made Alone
Here are some questions to help you decide which entity is best for you:
- What do I hope to accomplish with my investment property business?
- Will I make changes to my business in the future?
- What am I willing to risk for this business?
Take the time to answer these questions and consider which real estate entity would be best for your business. There are several options to choose from—and it is vital to you as an investor to find the right one to suit your needs.
- No matter what type of real estate entity you choose, the peace of mind that comes from knowing that you are protected from personal loss is a powerful motivator.
- You have insurance for your health and your car—consider a real estate entity as ‘insurance’ for your assets.
- Sometimes things don’t work out the way we had hoped; protecting yourself from any fallout should things go south is the goal of selecting a real estate entity.
A skilled San Antonio property management company can help you understand the benefits of establishing a real estate entity for your investment properties.
As a trusted property management company in San Antonio, we know you can’t afford to make a wrong move when it comes to growing your long-term wealth. With our property management services by your side, you won’t have to feel lost when making the decision.
Each choice you make that leads you closer to financial security is what real estate investing is all about. Whether you have one property in San Antonio and are just getting started, or ten properties and looking to expand.
If you are interested in having your property managed by Real Property Management Campanas, have more questions, or just want to speak to one of our team members, then contact us online or call us directly at (210) 314-1039 today!