Learning how to structure a real estate investing company, while critical to the formation of a business, has become synonymous with a degree of trepidation. Not surprisingly, few are well-versed in the field of business structuring, and even fewer are less than comfortable taking the appropriate steps to protect themselves. It is not uncommon for investors such as yourself to have little to no experience in establishing a legal business entity.
However, it is important to note that the most prominent real estate investors of our time were once in your shoes. Nobody inherently understands the infrastructure of legal entities and business structures without some form of training or education on the subject.
If you are otherwise unfamiliar with the ins and outs of structuring a real estate investment company, don’t worry; you are not alone. A lot of people are oblivious to the concept of a legal entity, but starting a real estate investment LLC needs to be taken seriously. That said, if you are interested in learning how to structure a real estate investing company, or simply need a refresher, I encourage you to keep reading.
Fortunately, it’s not your job as a real estate investor to know how to structure a real estate investing company; there are businesses whose sole purpose is to help entrepreneurs such as yourself navigate the process. It is, however, your responsibility to mind due diligence. While you may not need to know every single aspect of this complicated process, it is in your best interest to do your research. Judging by the fact that you have made it this far, I would say you are on the right track.
Below you will find a few of the most common questions aspiring entrepreneurs have regarding how to structure a real estate investing company. Please take a minute to familiarize yourself with a few basic concepts and then I will proceed to fill you in on the fundamental business structure real estate investors tend to favor.
1. Why is it important to structure a legal entity as a real estate investor?
Investing in real estate, at least on a successful level, has more to do with running a business than investing in individual properties. Do not, for one second, assume your real estate investing efforts are anything less than a viable business operation. Having said that, the very nature of a business attracts lawsuits. The involvement of capital, especially on the level you are likely to be working with, will always attract scrupulous individuals. It is, therefore, in your best interest as a business owner to protect yourself from said risks.
Legal entities have the power to protect business owners’ personal assets from what happens within the confines of the business structure. In other words, your personal assets (barring a few exceptions) will not be at risk in the event litigation against your company is initiated.
Outside of protection, however, legal entities can offer business owners several benefits; some of which include:
2. Why does the state of origin matter to a business structure?
Not surprisingly, different states have become synonymous with different laws. Everything from the amount of paperwork that needs to be filed in order to establish a legal entity to the time it takes said entity to activate can vary dramatically between state boarders. Business structures created in the state of California, for example, can take anywhere in the neighborhood of a month to be activated. Nevada, on the other hand, can witness business entities established in as little as 24 hours.
Again, each state will have advantages and disadvantages; you just need to know which will suit your needs the best. However, Nevada is widely considered to be one of the best states for business owners to form their legal entity in before they take it back to their state of origin. In fact, roughly 80% of the business entities formed in Nevada are for out of state entrepreneurs.
Real estate investors, in particular, are especially keen on the idea of forming a business entity in Nevada for one reason more so than any other: personal protection. The state of Nevada has gone to extremes to protect the personal assets of business owners.
3. What common mistake do people make when trying to set up an entity themselves?
Far too many real estate investors start their businesses without having formed a legal entity; for one reason or another they neglect to structure their business before investing. Instead of taking the appropriate steps to protect themselves, they become susceptible to any number of risks. I can’t stress enough how dangerous it is to start investing without the protection of a legal business entity; do not do it!
I don’t advise investing in real estate before you set up a legal business structure. While the path of least resistance to your first deal may be appealing, I can assure you it is not worth placing yourself in the way of unnecessary risk.
I want to be perfectly clear; there is no “one size fits all” legal entity that can meet the needs of every investor. The capacity in which a legal business structure may benefit an individual investor is determined by the needs of said investor, and nobody else. Every investor is different, and will require a different business structure that suits their particular needs. Again, mind due diligence and determine which structure will benefit your company the most.
Having said that, most real estate investors tend to establish a Limited Liability Company (LLC) at the onset of their career. Though not the only option afforded to real estate investors, LLCs tend to accommodate entrepreneurs in the real estate industry more so than other legal entities.
According to Legalzoom:
“A limited liability company is a separate and distinct legal entity. This means that an LLC can obtain a tax identification number, open a bank account and do business, all under its own name. The primary advantage of an LLC is that its owners, known as members, have “limited liability,” meaning that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC.”
Here are a few of the reasons real state investors prefer LLCs to other legal entities:
If you are interested in learning how to structure a real estate investing company, I want to encourage you do do a little research of your own. While LLCs are certainly advantageous to the average real estate investor, they are by no means the only option. Consider which legal business entities are best for your current position, and go from there.