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How to Structure Real Estate Investment Company

How to Structure Real Estate Investment Company

How to Structure Real Estate Investment Company

Structuring a real estate investment company that will help clients sell or lease a property is a challenging task. This involves choosing the business structure that your company would use to carry out its operations. Given that choosing a structure that best suits your company’s purpose is difficult, it is best to seek advice from the experts. 

However, although expert’s advice is recommended, you should also learn more about the business structures used by other establishments and how they work.  

Types of Business Structures for Real Estate Companies

Not all real estate investment companies use the same business structure. Technically, these companies use structures that are compatible with the services they provide. Among the most common of these are the following:

Sole Proprietorship

A sole proprietorship is regarded as the most straightforward business structure used in the real estate investment industry. Under this structure, the business is managed and controlled by a single owner who is responsible for making all the decisions and for handling all obligations that the company has entered into.  The structure also provides the following pros and cons.

Pros

  • Has a simple structure
  • Has a centralised policy-making process
  • Is easy to control

Cons

  • The owner gets all the blame in case of problems.
  • The owner faces greater financial exposure.
  • Cannot easily qualify for business loans
  • Does not easily qualify for various tax incentives offered by the government

Limited Liability Company (LLC) or Limited Partnership (LP)

Many real estate companies make use of the Limited Liability Company (LLC) or Limited Partnership (LP) structure. An LLC is formed either by a single person (single-member LLC) or multiple owners (partnership LLC or Limited Partnership). 

Pros

  • The structure provides several legal protections to owners.
  • Allows the business to become a ‘pass-through’ entity for taxation
  • Can easily qualify for business loans
  • Can easily qualify for tax incentives

Cons

  • More expensive to maintain
  • The owners/partners shoulder all taxes.
  • The business earnings are divided between and among partners (including the limited partners).

Corporation

Most of the established real estate investment companies operate as corporations. Many investors prefer to set up corporations because of the following pros and cons:

Pros

  • Provides greater legal protection to the owners
  • Allows the business to take on bigger deals
  • Has more financial capital
  • Gets most of the best loan deals from lenders
  • Can conveniently qualify for the tax incentives offered by the government

Cons

  • Cumbersome to establish
  • Expensive and complicated to maintain
  • The business pays all the taxes.

How to Choose a Business Structure to Use

Selecting a business structure to use for your real estate investment company is very important. You need to choose the structure that allows you to provide your clients’ needs and earn revenues as well.  So, to make sure that you’ll choose the appropriate structure, consider doing the following:

Do some research

One of the most effective ways to know which business structure is compatible with your company is doing some research. To do this, you need to look for the most commonly used structure in the real estate investment industry. Read and understand how each works and decide whether any of this suits your company’s goals.

You can also check some of the established real estate investment companies’ websites so you’ll know the system that they are using. Make sure to check if they are doing well with the structure they are using or not. If yes, you can consider adopting the system in your company. 

Ask help from experts

Many successful real estate investment companies have selected the best business structure with help from experts. So, if you are having a hard time deciding which structure to use, do what they are doing. Seek advice from a reliable lawyer and accountant. 

In general, a lawyer will lay all the possible options to you. Also, the lawyer can explain the legal benefits and disadvantages of each structure so you’ll understand them better. 

After doing that, you also need to seek the advice of an accountant to know the requirements for each of these structures. The accountant can also explain all tax and other monetary advantages of each business structure.

Upon completion, make use of the information you’ve gathered and decide which business structure to pursue. 

Finally, seek advice from established property management companies. These companies have extensive experience in dealing with real estate investment companies, so they know which of these are using the best business structure.

Conclusion

Real estate investors should know the right business structure to use when planning to create a company. Knowing first-hand which structure to use increases the chances of making the company successful. Doing this also allows the company to maximise its revenues and reduce the taxes that must be paid.

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How to Structure Real Estate Investment Company

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