Have you incorporated your real estate investment portfolio? There are different business entities that you could choose to protect your property management company. When you invest in Detroit property, incorporating provides legal protection from certain liabilities and offers tax benefits to you as an investor.
You should consult with your lawyer and an expert property manager to choose the best business entity for your needs. While this article isn't meant as legal, tax, or financial advice, we'll talk a bit about two types of incorporation to consider: an S Corp, and the most common for real estate investors—the LLC. Here's what investors need to know!
If you currently operate your real estate investment portfolio (or even a single rental property) as a sole proprietor, your rentals and personal income and assets are at risk.
A sole proprietor entity is a business owned by one person. This business entity doesn't have to be legally registered with your state. While it’s simple and free to set up your sole proprietor business, it leaves you without critical protection from a resident lawsuit when you invest in Detroit property. Without legal incorporation with the right business entity, you could lose your rental property, investment income, and personal income and assets if a lawsuit doesn't turn out in your favor.
However, by incorporating your properties, investors separate personal income and assets from business income and assets. It's the best way to avoid losing everything when an unhappy renter or vendor wins a lawsuit against you.
What Is an LLC?
A Limited Liability Company (LLC) is a combination of corporation, partnership, and sole proprietorship for tax purposes. However, with an LLC in place, your rental properties and income stay separate from personal assets and income.
An LLC business is less complex than a corporation, but it offers many benefits that aren't available to the other entities. With successful incorporation as an LLC, you have safeguards from personal liability regarding your rental property business. When you invest in Detroit, this means that if someone has an accident and is injured on your investment property, they can't sue you personally for medical expenses and damages. They would have to sue your LLC business. So, an LLC protects your personal assets in case of a lawsuit.
Tax Benefits Are a Plus!
If you have an LLC business, your investment property is pass-through taxation. You don't have to file a separate tax return for your rental properties, and you report business taxes and income as a sole proprietor. Be sure to work with your accountant to understand and follow federal tax laws when applying an LLC incorporation to your Detroit real estate investment business.
In most cases, setting up your LLC is simple and affordable. Your lawyer or accountant can walk you through the process of setting up a business name, filing the appropriate paperwork, and paying the fees. Be sure you understand annual tax requirements and filings to maintain your company's legal status as an LLC. However, compared to an S Corp, LLC's have fewer legal requirements and tax responsibilities. For these reasons (and others), most real estate investors prefer the simplicity, tax benefits, and protections of an LLC versus other types of incorporation.
What Is an S Corp?
If an LLC doesn't seem quite right for you and you're building a significant real estate investment portfolio in Detroit, it might be worth considering an S Corp as your legal entity. However, with an S Corp comes more tax and reporting requirements that can become a hassle without the right counsel and property management help.
Consider an S Corporation if:
- You plan to have shareholder investors in your real estate investment business
- You won't exceed 100 shareholders
- Your business will have only one class of stock
- Your shareholders meet specific eligibility requirements
- Your business is based in the U.S.
Building an extensive Detroit real estate portfolio to generate significant wealth often involves shareholders to fund investment properties. With larger portfolios, sometimes an LLC doesn't offer enough protection compared to the benefits of an S Corp. However, be prepared to experience tax benefits that might not improve your take-home income at the end of the day. You'll also deal with shareholders, hold meetings, and deal with more government involvement on your tax and profit structure.
Use the Right Business Entity As Protection To Invest in Detroit Property
Own It Detroit helps investors create tremendous cash flow and thriving real estate investment portfolios. When you invest in Detroit property, our team can also help protect your properties and income and encourage the incorporation of your rentals with the right entity.
Whether you choose a few rental properties or have your goals set on a significant portfolio, our seasoned experts can help you manage each investment to success! If you're ready to talk more about how a best-in-class real estate investment team can keep rentals safe and boost ROIs, let's connect.
Learn more about how to protect your rental properties when you download a free copy of "Protecting Your Investment Property: A Guide."