When it comes to incorporating, you’re going to want the guidance of both legal and accounting professionals to make sure that everything is done properly. Everyone’s business will be different: you may plan to scale up your business in a particular manner, your available assets will differ, and regulations vary from state to state. But based on my personal business experience, I can offer some food for thought and share what has worked for me.
It’s important to have the help of an accountant who understands real estate transactions and associated concepts like appreciation. Additionally, you need to work with an attorney that also specializes in real estate. It’s better if both professionals are specialized further in the types of real estate deals you’re going to pursue. For example, if you’re going to do a lot of fix-and-flip work, an attorney or accountant that works mostly with commercial development isn’t an ideal choice. You also want your chosen accountant and attorney to be able to communicate effectively with each other to keep things running smoothly.
Many people open their corporate entity immediately when they set out to start investing in real estate. An LLC is a good choice for real estate investors, but it’s my recommendation that you don’t open this LLC until you have your first accepted offer. This might seem like doing things in reverse; a natural assumption is that you should have your LLC open so that you can hit the ground running. But consider that having an LLC has costs associated with it, including tax liabilities. If you open your LLC before you have your first accepted offer, there’s a chance that you’ll be spending money on the LLC before you have any deals justifying its existence.
One possibility is to get a property under contract in your own name, with the ability to reassign the contract to an entity of your choice (in this case, your soon-to-be-open LLC) at a later date. At this point you can open your LLC. Be sure to follow the proper protocols. For example, in NY, you need to publish. Be aware that opening an LLC is a little bit more expensive than forming other types of corporations. It can cost anywhere between $800-$2,000 depending on who executes the incorporation for you and what the fees are.
As your operation increases in size, you may want to layer your corporations. For example, I have an S-Corp holding company from which I draw my weekly salary. This S-Corp is the owner of all the LLCs that I own. These LLCs are specialized for different areas of real estate investment: Some own rental properties, others are for fix-and-flip deals, etc. The point of all this is that as an individual I own nothing, for both liability and tax reasons.
LLCs can be a crucial part of ensuring your sustained success, just remember to have a trusted accountant and attorney to work with in order to be sure that everything is executed properly.
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