Knowing which legal entity is the best choice for your needs is key to protecting your real estate investments. When it comes to rental properties, what incorporation makes the most sense for investors?
There are two common structures that real estate investors often consider when setting up their businesses: a limited liability company (LLC) or a sole proprietorship. What is the difference between these two legal structures? Read on to find out which one will give your rental properties the most protection and how a Glen Burnie property management company can help.
Why It Matters
When you started with your first Glen Burnie rental property, you likely filed for your business license and spoke to an accountant or attorney about your business structure. They may have suggested a limited liability corporation (LLC) for your rental. Filing taxes is simpler if you are a sole proprietor, but in some instances, that can be a big mistake. Without a structured business entity, your rental properties and income are at risk.
Under a sole proprietorship, your business is in your name. If a renter sues you, they can come after your home, assets, and any private property that you have. However, if you have put your rentals into an LLC, the business is sued rather than you personally. Your personal income and assets are separated from your business.
For example, a renter slips and falls on ice that a property manager neglected to clear at the building. She is rushed to the hospital after breaking a hip. The renter is then out of work for several months while she recovers. She sues the owner for damages and medical expenses. Because the owner runs their property as a sole proprietor, they have to pay out-of-pocket to cover legal costs, the renter's medical bills, pain and suffering, and maybe more. In this scenario, if the owner had protected their rental property business with an LLC, their personal assets would not have been included in a lawsuit against the property and owner.
How To Choose
What's the right business structure for investors and rental properties? A sole proprietorship is easy at tax time, but it also makes investors vulnerable to legal issues and financial challenges. To understand the best business entity for your needs, work with a Glen Burnie property manager and your lawyer to walk through your options and set up the best protection for your rentals.
Here is a helpful breakdown of these business structures.
As an individual in a sole proprietorship, you own your business and are responsible for it. It is a very simple filing, and there are no additional considerations or responsibilities until you file your taxes.
The drawback of this business entity is that you assume all the risks because you and your business are one entity. Hence, you are personally liable for all debts and legal action brought against you. That means your bank account, assets, car, and home are all at risk if your cash flow suffers due to tenant defaults, unexpected emergency repairs, or losing a lawsuit.
Limited Liability Company (LLC)
A limited liability company is a structure similar to a larger corporation but with fewer restrictions. An LLC has limited personal liabilities, meaning that members of the LLC can't be held personally liable for any debts or obligations without their consent.
This type of incorporation also offers some limited management and tax-saving benefits, such as reduced tax rates from self-employment taxes on net income. Glen Burnie investors also often have more money available for investments and expenditures because there is no self-employment tax to pay.
With this business structure, you can form it alone or with others, such as your business partners. Be prepared for some paperwork, fees, and a few IRS requirements to form an LLC. While it's not an overwhelming amount of paperwork or requirements, your accountant, lawyer, and property manager can help you set up a hassle-free system for maintaining your LLC.
Protect Your Investment With Glen Burnie Property Management
As a business owner, you want to grow and scale successfully to meet your long-term financial goals. While Glen Burnie real estate is a relatively safe and consistent way to invest, it's not entirely without risks. To help mitigate your losses, choose the proper business entity that can protect your business and your assets. Forming an LLC instead can ensure that you aren't sued or liable for damages if a renter is injured.
If you're concerned about filings and insurance or choosing the business entity that makes the most sense for your needs, don't go in alone. Hire a Glen Burnie property management company professional to help you confidently grow your business and protect your real estate investments! Renters Warehouse BW Metro helps investors set up their businesses and apply best practices to minimize risk and protect income. We're here to help!
Learn more critical ways to keep properties and income safe. Download our free ebook, "Protecting Your Investment Property: A Guide."