If you've already found your first Baltimore rental home to purchase and done any necessary renovations on it, you might feel like you're ready to get a renter in place. However, before you go much further, it is essential to take steps to protect yourself and your business from legal actions filed against you.
You also want to create a clear break between your personal assets and your investment property business. Setting up the right business entity in Maryland is designed to do just that! With the help of a Maryland property management company, you can get insights into which option might be the best for your growing business.
Keep in mind that this information is not legal counsel. We highly encourage you to work with an experienced attorney if you’re not handling this process via full-service property management.
What Is a Legal Real Estate Entity?
Setting up the right business entity is essential for navigating your approach to reviews by the Internal Revenue Service around tax time. One key reason for this is because the form of business you establish determines how you will pay taxes on your income from your Maryland rental homes.
The most common options we see in real estate include a Sole Proprietorship, Partnership, Corporation, S Corporation, or Limited Liability Company (LLC). It’s important to take the time to learn about each one on your own (or with your trusted attorney) to ensure you understand the legal and tax implications of each.
Which One Is Right for You?
The answer to this question really depends on the financial goals you have in mind concerning your real estate investments. Each one behaves a little differently and has more or less benefits for investors depending on the type of property you want to hold.
This is the simplest form of business structure. There is no break or distinction between the company and the individual who owns it. In this case, you are entitled to all the profits you earn, but you also maintain responsibility for all debts and losses. You are also solely liable for your business.
Sometimes called a general partnership, it holds the same basic legal structure as a sole proprietorship. The difference is that there are two or more owners in this relationship. Each person in the partnership contributes to the business, and all are responsible equally for profits, liability, and losses.
Limited Liability Company (LLC)
An LLC is much like either of the previously mentioned entities. However, it creates a line drawn between your personal liability and your business liability. Those in this type of legal entities are not 'owners' but are considered 'members' of the LLC.
There are several types of corporations. Some are set up to be used to allow the business to sell stock to others. Others are a tax-exempt structure. Close corporations are those that do not allow public access.
Unless you plan for your real estate empire to reach epic proportions, you likely won't resort to a corporate business entity.
What Is the Value of a Business Entity in Maryland?
It does cost a bit of money to set up your business entity, depending on the type you choose. However, once you do this, you gain several key benefits to having a legally defined and protected business. Some of those benefits include:
- Having the legal right to do business in the DMV area
- Putting in place limitations on liability for you
- Personally protecting your assets from business losses
- Minimizing access to the property from creditors
- Protecting your business from lawsuits filed against it
- Ensuring proper taxation is being applied not just to meet IRS rules but also to minimize costs.
The business entity you select can help you to make money but also help you to avoid losses. It can even help you to offer a more professional image to your renters. They know they are working with a legitimate company—not just a person that owns the property.
Of course, you can also help further that image when you work with professional Maryland property management services and a capable attorney to select the right real estate entity.
Work With an Attorney to Make the Right Decision
While your Rent Estate™ Advisors here at Renters Warehouse can provide you with some insights and information to help you decide, it is always best for you to hire a real estate attorney to help you make this decision. That’s because there are numerous consequences to making the wrong decision. This could include:
- Facing liability claims against your home or personal assets due to limited protections
- Overpaying in taxes
- Not paying enough in taxes
- Not sharing profits and losses properly with other investors
- Claims made against one person involved in the business impact others.
The list here can go on.
What you must take into consideration is your unique needs: even the area of Baltimore you are buying real estate in can play a role in the type of real estate entity you put into place! Your Maryland property management team can provide you with insight based on the rental market, but you need an attorney who can pinpoint specific circumstances in your situation that may be best or better for you.
Before You Buy More Real Estate...
...Settle this crucial matter first. A mistake like this can cost your business significantly. Plus, it's harder to add properties to your business entity after you've already purchased them than it is to include them during a purchase.
- Your first step should be to hire a real estate attorney to help guide your decision making. Then, work with your Maryland property management company.
- Let our team at Renters Warehouse BW Metro provide you with the guidance and support you need. When you hire our team, you’re making the smart investment decisions you need to do well for years to come.
Ready to learn more crucial real estate investment tips for success in the Maryland area? Download your free copy of our guide to real estate investing success.