As a real estate investor, you are well-versed in how to spot a wise investment and manage your real estate portfolio, but many behind the scenes elements of running your business—such as the legal entity you choose to form and organize your real estate investment business—are just as important.
One of the most important things to consider when choosing a business structure for your real estate investment business is asset protection.
A sole proprietorship is generally not advised for real estate investment businesses, as it affords no protection from personal liability for claims against the business.
LLC or LP
A limited liability company (LLC) or a limited partnership (LP) are popular and prudent choices for structuring a real estate investment company.
An LLC affords you some insulation from personal liability and allows “pass through” taxation, so that your personal income is taxed, rather than having to deal with filing taxes separately for your business and often providing a lower rate of taxation. This structure provides you with more protection than a sole proprietorship and more tax incentives than a corporation.
Within an LP, there are at least two partners: a general partner and a limited partner. The general partner has unlimited liability, while the limited partner is only liable to the extent of their investment.
A Better Approach: LLC and LP Hybrid
Perhaps an even better approach for optimizing asset protection for your investments is forming both an LP and an LLC and structuring the LLC as a general partner within the LP. This structure provides added insulation to protect your assets from lawsuits and creditors because as a limited partner, your personal assets will not be seized.
Be sure to consult with an experienced lawyer to help you choose the best business structure for the particular circumstances of your real estate investment business.