Who Needs A Real Estate Holding Company
A real estate holding company is typically a great choice for short-term and long-term investors. Any real estate investor can benefit from protecting their personal assets from any business liability, and its also smart to keep your real estate income separate from your personal income. Holding companies are relatively inexpensive to start, and the benefits generally outweigh the cost and upkeep to maintain them. Note that you do not need to start an LLC if youre just purchasing a home as your primary residence.
Do Holding Companies Pay Taxes
Holding companies do pay taxes, though they can vary slightly depending on the organizational structure. For example, a holding company with one business owner will typically be treated as a sole proprietorship. This means the entity itself is not required to file with the IRS, and instead, owners will need to report all profits in their tax paperwork. A two-person LLC, on the other hand, will be treated as a partnership. This means each owner will be responsible for paying taxes on their share of the returns. For more specific information on how a holding company is taxed, be sure to consult a professional with any questions.
Limit Your Personal Liability
If you own your property as an individual and someone files a lawsuit against you, then your personal assets are at stake. However, if you create an LLC, then the only assets at stake are those owned by the LLC. In other words, your rental property is the only asset at stake and not your personal finances.
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Walton Enterprises As An Example
One of the most famous family LLCs is Walton Enterprises LLC, which is the vehicle through which the members of Sam Waltons family own their shares of Walmart Stores, Inc. In effect, Walmart is controlled by Walton Enterprises LLC, which is controlled by the Walton family.
Each Christmas, the family meets at Helen Waltons home, and the managers of Walmart make presentations to the LLC members. The members decide whether to pay dividends, reinvest in other operations such as the Arvest Bank, and listen to a host of other options.
It has been reported that the family LLC wont make decisions unless everyone is in agreement, explaining how Walmart has experienced almost half a century of consistent control, culture, and growth.
Create An Llc Operating Agreement
This is probably the most complicated part of creating an LLC, but the good news is that the document is not necessarily required to be filed with the state. Still, you should create an operating agreement for your LLC to avoid conflicts later.
Even this document can be relatively simple, and does not necessarily need to be prepared by an attorney .
The purpose of the operating agreement is to spell out the rights and responsibilities of each owner of the LLC. It is very similar to corporate bylaws or to partnership agreements, which are largely intended to provide a framework to deal with conflicts or with the transfer of ownership between partners, both existing and new.
The operating agreement should provide for owners rights and responsibilities, voting power, percentage interests in the business , and the scheduling of owners meetings. A very detailed operating agreement may even include management responsibilities between several owners.
The agreement can be as detailed as you need it to be, but its a necessary document if there is potential for any disagreement between owners over either the ownership or management of the LLC.
And dont be intimidated by the form requirements, either. You can often get them from your state offices, or through a general web search . Failing all else, you can always check out LegalZoom.com, or one of their competitors, for low cost pro forma legal documents.
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How To Start A Real Estate Holding Company
Starting a real estate holding company is not as complicated as it may seem. Investors can familiarize themselves with the process and get started today. Here is a step by step guide to starting a real estate investment company:
Choose a business name: First and foremost, you will want to research your states rules on setting up an LLC, such as through this guide provided by the U.S. Small Business Administration. The first step is selecting a business name, which will always be followed by a comma and the letters LLC. Make sure to run a search to make sure that your desired business name is not already taken.
File the Articles of Organization: Once the business name and business address are determined, a document entitled the Articles of Organization must be filed with your states LLC office typically the Secretary of State. The document is often available as a simple, fillable form found on the Secretary of State website, along with submission instructions. Once prepared, the document can be submitted by mail or in-person with a filing fee.
Publish your intent to file: Although required only by a few states, find out whether or not you are required to publish an intent to file through your local newspaper. Otherwise, your LLC is considered officially formed once your Article of Organization are accepted and approved by your Secretary of State.
Whats Best For Real Estate Investors : Llc Or S Corp
There are many Real Estate Investors that are unsure whether they should establish a Corporate Entity or not. The primary purpose of having your Real Estate Investments, in a Corporate Entity, is to protect you personally. You want Asset Protection. Ideally, for Buy and Hold Investments, you would want to create a LLC, for each property. This may seem a daunting task and you may be thinking how to manage all the bookkeeping. Depending on your area and the value of each property, you may want to consider grouping properties into a single LLC that does not exceed a total monetary threshold.
To better illustrate this concept, I will share my Company’s Business Model. Each acquisition is placed in its own Clone LLC, with the only member of the Clone LLC being the Umbrella LLC. This funnels all net gains and losses, from each Clone LLC, to ACT Investment Properties, LLC that operates as the Umbrella LLC. This Business Model only requires two Bank Accounts: a Corporate Checking Account and a Corporate Savings Account.
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Costs Of Setting Up A Holding Company
The cost of setting up a holding company for your real estate investments will vary based on which state you live in. If youre setting up the LLC yourself, the average state filing fee is between $10 to $800. If youre working with an attorney or financial planner, they will charge you for their time. In addition, youll be responsible for paying an annual fee, which ranges from $0 to $800 depending on your state.
Can Owners Of An Llc Be Personally Sued Or Held Liable In Court
LLCs are popular for the conveniences and protections they offer to their members, but theyre not bulletproof. There are times when a court can pierce the corporate veil and cut through the paperwork barrier that separates the LLC from its members. Those to whom the LLC owes money may attempt to use this loophole to try to go after personal assets, if the LLC itself has insufficient funds to cover its debts. FYI, this is much easier for a creditor to do when personal assets or accounts have been allowed to merge with the LLCsAlthough in a perfect world, this wouldnt be an issue anyway, seeing as one of the reasons for forming an LLC is to create this separation in the first place.
In the case of personal fraud or negligence, the LLC wont shield the guilty party either, because the trouble arose from their actions. It might cover the other members, though. Youre on the hook for unpaid taxes, tooan LLC is no match for the IRSs might. Again, both of these liabilities can vary depending on the situation, the state, and the LLCs setup.
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Growing Your Family Investment Llc
Although you and your family may not have over $169 billion to put into your LLC like the Waltons, it is important to remember that they started with almost nothing and built it themselves from a tiny store in Arkansas.Disciplined investing over time can lead to great results, especially when protected by a family culture that values building wealth together.
Another famous family LLC is Cascade Investment LLC, the private holding company of Bill Gates. Cascade, which was funded by the systematic sale of Microsoft shares over many decades, now owns everything from luxury hotels to car dealerships, and railroad stakes to restaurants.
What Is The Best Llc Structure For Your Rental Properties
Summary: Many real estate investors use limited liability companies to house their investment properties. This post covers the reasons you should consider putting your property in an LLC and contains an overview of our personal LLC structure. We also provide a checklist with step-by-step instructions for setting up your LLC.
A limited liability company is a business structure that allows for limited liability for its owners. LLCs are popular among real estate investors because they offer additional legal protection with the added benefit of flow-through taxation.
When we first started real estate investing, Kenji and I set up several LLCs to hold our real estate purchases. Over the years, we have continued to spend the time, money and effort to create additional LLCs because we believe the benefits of housing our properties within LLCs far outweigh the costs to create and maintain the structures.
The goal of this post is to cover the benefits of LLCs and to offer a real-life example of how to set up your LLCs, using our personal LLC structure as an example.
As a reference to use in this post, heres a diagram of how our LLCs are set up.
And with that, lets address why we put our properties in LLCs using this structure.
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Using A Delaware Llc For Real Estate Investment
Investing in real estate can be a lucrative business, especially in a high demand area. Though not every investment yields returns, if you can afford the upfront costs of purchasing a property, both short and long-term investment strategies can be profitable.
The term real estate investors includes a diverse group. A single person purchasing a summer home that she rents in the offseason is a real estate investor, as is someone who buys, fixes and flips several properties per month. What all these people have in common is a need to separate their investments from their personal assets.
Forming a company does just that, but its not quite that simple. If youre investing in real estate, or planning to start, its important to understand your options. This post reviews how to determine which state to choose as your home, and why LLCs are the most popular entity among real estate investors.
What Is An Investment Llc
An Investment LLC is a limited liability company that is established for the purpose of making investments. An LLC is a popular legal business entity because they are easy to create and provide the owner of the company with several benefits like liability protection and tax benefits.
Advantages of an LLC include:
- Easy to create
- Limited compliance laws
- Pass-through taxation
- Flexibility for the owner to choose management structure
LLCs can be created for any business purpose, whether running a brick and mortar store, purchasing and selling real estate, or investing.
Investment LLCs have been growing in popularity due to their various benefits to investors. It is common to have two or more people interested in ajoint venture for the purpose of investing.
An investment LLC will protect all partners involved in the company from liability. This allows multiple parties the opportunity to pool their money and profit not only from investments but from the various benefits offered by the limited liability company.
Read more about LLCs and their benefits by .
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What Is A Holding Company
A holding company is a type of firm that owns other investments, including whole companies, instead of engaging in operating activity itself. Its a way to reduce risk and liability when it comes to investing in property. The financing, deed, and contract are under the name of the holding company, not you as the individual investor. In this blog, we will refer to one of the most popular forms of holding companies, the LLC.
What Business Forms Are Most Attractive To Investors
Investors like to minimize their risk. That generally means that a business entity that provides a liability shield is preferable. In a partnership, an investor would effectively become a partner by contributing capital and sharing in the right to manage and to receive profits. A general partner has no liability shield, while a limited partner’s liability is limited to the amount of his or her contribution. Members in a limited liability company also enjoy a liability limitation.
Only corporations provide a true liability shield and can issue stock. Stock can be issued either as voting shares or non-voting shares. A corporation can issue just a few shares to a small number of shareholders, including investors, or it can make a public offering to the broader market of investors.
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Ease Of Forming An Llc
Creating an LLC is a much simpler process than creating a corporation and generally takes less paperwork. LLCs are under the jurisdiction of state law, so the process of forming an LLC depends on the state in which it is being filed. Most states require filing articles of organization with the Secretary of State and some states allow for them to be filled out online. A few states require an additional step of filing a public notice, often in local newspapers. Once these steps are completed, the LLC is officially formed.
Once an LLC is formed, it’s good business practice to set out the roles and responsibilities of the members. The members are individuals with an ownership interest in the LLC. Most LLCs use an operating agreement to define these roles. Drafting an operating agreement is not necessary for an LLC to be valid but it is a prudent course of action. If no operating agreement is created, an LLC is governed by the default rules contained in state statutes.
The operating agreement sets forth the rights and responsibilities of the members. It can define the business relationship and deal with issues of capital structure, the allocation of profits and losses, provisions for the buyout of a member, provisions in case of the death of a member, and other important business considerations.
How To Establish An Llc
To establish your LLC youll need to create an LLC operating agreement and file paperwork in the state where the LLC is domiciled.
Consulting legal counsel that is knowledgeable about IRAs and the state laws governing them is advisable. A knowledgeable attorney can build parameters into the operating agreement that prevent the LLC from engaging in prohibited transactions.
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Another Option: Limited Liability Limited Partnerships
To help make limited partnerships as appealing and useful as limited liability companies, roughly half of the states in the U.S. have allowed for the creation of an entity known as a limited liability limited partnership or LLLP. It functions similarly to an LLC but has its own unique advantages and disadvantages. Find out how this new legal entity works and whether it is right for your family business or investments.
Still Not Sure About How It Works Here Are A Few Real Estate Holding Company Examples:
Lets say you buy an investment property, a tenant falls down the stairs and decides to sue you for their clumsiness. They could come after your personal assets via a personal injury lawsuit.
Or maybe you and your tenant disagree about whether or not you will be returning their security deposit. They could decide to settle it in court, putting your personal assets on the line.
When you create an LLC, the only assets in jeopardy are those owned by the LLC. This means your home, car, bank account, and other assets arent in danger if a tenant decides to sue.
There are many reasons why working through an LLC is considered one of the best business structures for investors:
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Publish A Notice Of Intent To Create An Llc
This is a requirement only in some states. Your state may require that you publish a legal notice in a local newspaper announcing your intent to form an LLC. The newspaper staff should be able to assist you in creating this notification. You may be required to publish the notice several times over a period of weeks or months, after which you may have to file an affidavit of publication with the state.
If you need to launch your LLC quickly, publishing this type of notice can delay the process. Be sure to check with your state to see if this is a requirement, and, if it is, allow plenty of time to meet the requirement.
Making An Initial Contribution Is Strongly Recommended
While most people do make an initial capital contribution, legally it is not required. You could simply appoint yourself as the sole member of your SMLLC without making any initial investment. However, you’d probably be taking a significant risk if you didn’t invest at least a small amount at the outset. Without any capitalization, your business may not appear to be truly separate from you, personally. In other words, without any initial contribution, if your business is responsible for someone being injured, or incurs a debt that it’s unable to pay, a court might decide that your company suffered from inadequate capitalization. It therefore might allow someone with a claim against your business to “pierce the veil” of limited liability associated with your SMLLC, and go after you, personally, for restitution.
Making a money contribution can be very simple: You write a check from your personal account and deposit it in your new business account. Moreover, you don’t necessarily have to invest a large amountfor some very small businesses, a few hundred dollars might be plenty. The main point is to pay in enough money to meet your initial expenses. Then, going forward, it’s important always to keep enough capital in your business to meet your reasonable, ongoing expenses.
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