What Every Real Estate Investor Should Know About IncorporatingPosted on November 9, 2010 by John Maurer, Esq.
One of the big pitfalls of starting a small business, such as real estate investing, is how to protect your personal assets from your business investments, and the other way around. If you buy everything in your personal name, you run the risk of a single lawsuit wiping out not only your investment, but also your personal property. As such, I generally recommend that all small business owners incorporate their business in some way as to provide maximum reasonable protection for your assets.
There is one good reason to buy property in your own name solely, and that is for a refinance. If you buy real estate and plan to refinance the property to get cash out, or to pay off a hard money loan, almost all conventional banks will require the property be in your own name. If you know this is your plan going in, then I recommend you buy the property in your personal name and keep it in your personal name until the refinance takes place. This will leave you exposed to the liability of the security deed, and any consequences of foreclosure or defaulting on the loan, but it is the only way to get the refinance done in the first place. Buying originally in your own name will save you from troubles with possible seasoning issues down the road. Even in this instance, I still recommend putting the property into a business entity of some sort after the refinance is complete.
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If you are not planning on refinancing the property, then I strongly recommend creating an entity of some kind. Once this entity is set up you should buy the property in the entity name as often as possible. Cash buys and most hard money lenders will allow a purchase into a company, although most hard money lenders will still require a personal guarantee. This creates a strong separation of business assets and personal assets that will be important if there is ever any litigation against your company or you personally. Even the most upstanding and careful individual can find themselves embroiled in a lawsuit, and its best to protect yourself as best you can.
Once you have decided to form a business entity, the question is which entity to setup. Georgia has very simple rules regarding Limited Liability Companies (LLCs). They can be set up relatively easily. They do not have the requirements of advertising and corporate seals and corporate books. If you are a sole member, an LLC is definitely the way to go. If you have a partner or a group of partners, and you want to keep everything on the books and well documented, you may wish to make an S Corporation. The S Corp is taxed as a partnership, but provides all the protections of a corporation. The main value of the S Corp over the LLC in Georgia is the record requirement. If you have several partners who are arms length participants in your company, an S Corp can provide a great deal of peace of mind between members of the company. If you feel that your partners and you will never argue or fight about the business, then you can stick with the LLC, and perhaps even write down some greater protections in the operating agreement, but often even close friends or family members can fight when money is involved.
Some investors stick to a strategy of one company that holds all their properties. Other investors make a separate company for each property. While the latter provides more protection, it does have a much greater amount of administrative filings and costs to keep all the companies going.
Once you have decided to form your company or companies, there are a number of steps you have to take to make it happen. I strongly recommend consulting with an attorney at least for the first few companies you put together. After that you may feel confident to try doing it completely by yourself. Most attorneys have very reasonable rates for setting everything up and allows you to save yourself the headache. Additionally groups like Atlanta-REIA occasionally put on workshops to help you set up your own companies. I will be hosting an Atlanta REIA Workshop on November 20th on How To Setup a Georgia Corporation. At this workshop I will go through all the steps to actually create your LLC or S Corp and actually create your business entity and all the basic supporting documents before its over. I highly recommend you attend! Read More About Workshop→