In today's Freedom Friday blog and email newsletter, I want to talk about a topic that has come up from time to time with some of my real estate clients, and that's what business structure they should use for a real estate holdings company.  I frequently get asked, “Should I place my house in a trust?” and a related question, “Should I place my rental property in a trust?”  A trust is not a business structure and may be appropriate if you have a residence and other assets you might wish to place in a trust for estate planning purposes.  However, a trust is not a business structure, and if you are considering a business with rental properties, or other real estate holdings, you need a business structure for your real estate holdings company.  In today's Freedom Friday blog and email newsletter, I'm answering the question, “What business structure is best for a real estate holdings company?”

The simple answer is that a limited liability company (LLC) is usually the best business structure for a real estate holdings company.  However, it may not be the ideal business structure for your particular situation.  If you are starting a real estate holdings company, you should consult with a business lawyer about what you are doing.  Usually the LLC is best, but your situation might be different, so check with a lawyer first.  So, why is an LLC the “best” business structure for a real estate holdings company, at least in most situations?  An LLC can protect business owners and their companies from the risks of running a business, including lawsuits, tenant problems, and unexpected tax issues.  Also, forming an LLC can be a very effective way to reduce the risk of personal liability from running a real estate holdings company.

When you form an LLC for your real estate holdings company, you're creating a business entity which is separate from the owners, including yourself, and this means that the LLC owns and manages the both the business and its associated real estate (and possibly the LLC owns subsidiary LLCs which might own the real estate).  If the LLC owns and manages the real estate, you and/or your co-owners will have plenty of flexibility as you manage your company, and if you have co-owners, split your profits.

If you don't choose to form an LLC, there are other choices for business structures for a real estate holdings company.  For instance, you could choose to form a corporation, which will provide you and your co-owners liability protection, but may not provide you with certain tax benefits, and can be more complex and expensive to develop, operate, and maintain.  You also could choose to form a sole proprietorship or partnership, which are the easiest business structures to own and operate, but don't provide personal protection from the debts and liabilities of the business.  In the case of a partnership, every partner is likely personally responsible for the actions of all the other partners, which is a risk most business owners don't want to take.

A primary reason that business owners form an LLC is to limit their personal liability.  If you do not have a legal business structure, your personal assets, including your home and savings accounts, are at risk if the business is sued or owes a debt.  When you operate as an LLC, your personal assets are protected against all sorts of liability because creditors and lawsuits are confined to recovering solely against the LLC's holdings and assets.  Of course, there are exceptions to personal asset protection, especially if the business owner is involved in some kind of legal wrongdoing, e.g., negligence or fraud, or there is a lack of separation between the business and the owner(s), e.g., the owner(s) use business funds for personal expenses, or vice versa.  In such cases, a court can hold an LLC's owners personally liable for business debts.

Thinking about starting a small business?  Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth?  Please contact me at [email protected] to schedule a FREE strategy session.

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