Real Estate Investing
Investing in real estate can be a very rewarding undertaking, but there are many potential risks and stumbling blocks along the way, not least of which include taxation and liability. In order to safeguard against these risks, many real estate investors decide to form a corporation for their real estate activities. This article looks at some of the steps involved in forming a corporation as a real estate investor.
Instructions
1. Determine how large your real estate investment operation presently is, and is likely to be in the next few years. This will have a key impact on the kind of legal entity you should settle on. If you plan on being a one-person outfit that makes relatively small, selective real estate investments, then you might want to form a Limited Liability Company (LLC) or S Corporation (S-Corp), whereas if you think you'll soon be expanding and will require capital from outside investors to fuel this growth, a C Corporation (C-Corp) might better suit your needs.
2. Further narrow which corporate entity you want to select by consulting with an accountant and/or attorney specializing in real estate investment. Different entities suit different real estate investors, but common concerns are minimize taxes, protect assets, plan an estate and reduce personal liability. Depending on the type of real estate investing you're involved in, an S-Corp or LLC taxed as an S-Corp might be ideal, since these entities feature pass-through taxation and limited liability, as well as allowing you to avoid self-employment tax. They are also comparatively inexpensive to form, maintain and, in the event you decide to shutter the business, dissolve. If your family plays an important part in running your business, a Family Limited Partnership (FLP) might be the best route. There is no one-size-fits-all solution to entity selection.
3. Appoint your board of directors and your officers. Decide who has responsibility for what, and specifically codify that in your bylaws. Your accountant probably will then prepare and maintain a ledger showing how many outstanding shares the company has issued, what class they are (in case you ever have multiple classes of shares) and who owns what percentage. If you are a single-member operator, you'll not have to deal with any board of directors or officers, but you'll still have to draft bylaws and conduct an annual meeting (even if it's only with yourself, as business owner). You should keep some kind of record of this so that you can prove the legitimacy of your business if state or federal regulators should ever have any questions.
4. Make it official. File Articles of Incorporation or Articles of Organization documents with your state's Secretary of State and obtain a Federal Employer Identification Number from the IRS. You will also have to obtain a local, or county, business license. Assuming this goes smoothly, your business should be live within one to two days.
