Details Behind Starting an LLC for Your Real Estate Business – Part 1

I thought it might be useful to put together a detailed post on some of the tangible benefits of starting a company for your real estate business and what the process looks like.

As you know, I am a business owner myself. In fact, I own several companies; an insurance company, a title company, a real estate management company, Keller Williams offices and more. Needless to say, I’ve started a few companies and would like to share with you what I’ve learned about setting them up.

It used to be that starting a company was an arduous task. One that required you to hire a lawyer most times and for the most part the process just took longer and cost more. Thankfully, times have changed somewhat in this regard. You can (and sometimes should) still hire a lawyer, but today, that is not always necessary to start your real estate business properly. In the age of information, you can quickly set up an LLC using online services such as MyCorporation to setup an LLC FREE.

Before we continue, I must first give you a quick disclaimer: I’m not a lawyer or a certified public accountant of any kind. Nothing I say or write should be held against me or my companies, and this information shouldn’t be taken as legal advice. If you’re looking for professional advice, I recommend consulting with a lawyer or CPA on your own.

Thank you!

 

Why Would You Want To Start Your Own Company At All?

I’m glad you asked!

 

There are of course many reasons why someone would want to start their own business or setup an LLC. Some of the most common reasons are: Legitimacy, Liability Control, Fulfilling a Lifelong Dream or Passion to start your very own business. For me, it was always a goal, a motivator for action, to have my own business. I knew that there would be a ton of responsibility (more than I imagined), but I also knew at a certain point, if I stuck with it, there would be more control and freedom (much more than I ever imagined).

Further reasons why someone may want to start a company:

  • Taxes: One of the very best things about starting a company, for many people, is that you can now start writing things off! Woohoo! To figure out what and how aggressively you can write-off business expenses, I recommend at least meeting with a CPA/Accountant to get an idea of what the rules are.
  • Personal Liability: In most cases, forming a company or LLC provides you with insulation from liability when it comes to your personal assets. For example say a company goes bankrupt or gets sued, the companies assets are separate from the owner’s personal assets if they have setup their company correctly, and the liabilities fall on the business assets (not your personal checking account).
  • Image: This one works both ways. It shows others you are a legitimate business that has registered with the proper authorities and more people are likely to feel comfortable working with you. On the other hand, it also gives many first-time business owners a sense of personal satisfaction and makes what they are doing feel that much more professional.
  • Personal Independence: This is the most common reason people start a business. They want to break out of the 9-5 grind. By starting a business you take full responsibility for your success and failure, and are one step closer to true independence. For some, that is freedom to do what they want, or it could be incentive to work 24/7 because they know the benefit flows to them, or it could be anything that brings you a sense of freedom and independence.

 

Why You May NOT Want to Start Your Own Business or LLC

I’m always striving to keep things balanced. So here is a look at the flip-side of the coin.

 

Do you have what it takes? Be honest with yourself. Starting a business is like learning to swim by nearly drowning. There are many highs and lows, the path is not linear or smooth. There is a chance you will fail. In fact, there is a guarantee that you will fail. Do you have the tenacity to fail forward? Or are you easily discouraged by setbacks? Maybe you are comfortable in your job and a change really isn’t that important to you.

Here are some things to consider:

  • You’re on Your OWN: The only person that can make this thing work is, you guessed it, YOU! That can be a daunting thought, especially when you start thinking about the future and the whole process your business has to take to become successful. A lot of people stop right here or never get past this sticking point. Think about it this way. At your job you have that one job to do (granted there may be many different tasks), when you’re the boss that also, most times, means you’re the accountant, janitor, and CEO; at least when you’re starting. In the beginning, you will have a hand in everything and may even be responsible for everything. That can be a lot to take in!
  • 9-5, what’s that?: You don’t have a schedule anymore. This thing called your business will be your life. That’s what it takes. You will not be home by 5PM every day. You will not work 5 days a week, 8 hours a day. You will work and work and work. Keeping steady hours is a real challenge because there is always so much you can be improving on every day!
  • Employer Incentives and Benefits: You won’t, at least in the beginning, have any of the benefits you may take for granted at your current job. Retirement accounts, 401K matching, health insurance etc. those are now your responsibilities. This can be a VERY challenging transition. Having a game plan, or stabilization fund can make the difference here.

Even with all that potentially “bad” stuff, I do not regret, for a minute, starting my own business. I am thrilled with the journey I am on and being a small business owner has given me more than I expected, both in stress and joy! However, you WILL get to a point if you keep at it, where things start falling together and you realize it was all worth the effort. I never stop, because the enjoyment is in the creation, in the excitement of starting something new that you’re going to pour your energy into. It’s hard to beat being an entrepreneur, you just might have to go through hell to get there.

If you’re still ready, willing and able then please continue reading along…

 

Business Structures: Types

When you’re starting a business you’ll need to figure out what kind of legal setup you are going to use and how you are going to structure that setup. Below is a quick overview of each business structure but you can also check out the Internal Revenue Service’s Website (which has a ton of good info).

 

Corporation:

For all intents and purposes, a corporation is a business structure that is treated as a separate legal entity from its owners. A corportation, ironically, is like its own person, with its own bank accounts and liabilities. These are typically more arduous to setup and are often time-consuming. Usually, you’ll go this route if there are shareholders, a board of directors and a staff etc. Typically, if this is your first business a corportation is not likely to be what you want.

The main advantage of a corporation is the release of liability as they relate to personal assets. There are amny diffrent types of corporations that you can setup, but that is beyond the purveiw of this post. One additional thing, that I think is important to mention, is that since Corporations are a separate legal entity they are taxed as such. This can get complicated in a hurry! Maybe a little too complicated if you’re just starting out.

 

Sole Proprietorship

A sole proprietorship, is like the name implies, a business structure owned by an individual. This is the most straightforward business structure to setup. It is also not without risk. All you need to do to start is to register your business with a DBA (doing business as).

Major downsides! You, as the business owner, are personally liable for and debts, suits, or problems your business incurs. Also, as a sole prop, you will find it VERY difficult to qualify for funding or get a bank to take you seriously. Income and expenses are on an individual personal return. ( the same thing goes for a GP below)

 

Partnership (General):

A GP (general partnership) is really similar to a sole proprietorship, except it has two or more people involved in the business. There is more upfront work gere than with a sole proprietorship becuse you’ll need to figure out a division of responsibilities, ownership levels and percentages, and any other odds and ends that pertain to the people involved in the business.

Danger ahead! You have all the same liability problems as with a sole proprietorship, but they are also compunded by the fact that you are also likely to be held responsible for any of your partners missteps! That can be a pretty big deal! Don’t beleive me, just google “business partnership nightmares”, and you’ll get an idea of how this can unfold. I avoid any sort of arrangment, when possible, that exposes my personal assets to liability.

 

Limited LIABILITY Company – LLC:

Like the name implies, your liability is limited. Since LLC’s are relatively new as business structures go, let’s take a closer look. First things first! Here’s why these are a useful structure, your LLC gives you similar protection to a corporation with much less fuss to setup. An LLC can also elect to be taxed many different ways. Some ways include: as a Sole Proprietorship, Partnership and as Different Types of Corportations. Also, your business operating costs and profits can be “passed through” to an individual tax return. (which makes things pretty simple).

Most of the companies I have setup have been LLC’s because of their protection of personal assets against business liabilities. They are, however, not without perceived weaknesses and downsides. Nothing is perfect, right?

 

Food For Though When it Comes to LLC’s:

  • Some states treat LLC’s different than others. Be sure you know how your state treats them! If they treat them more like a sole proprietorship you may want to explore other options. For me, I ALWAYS focus on insulating my personal assets from my business assets. You don’t want to lose the house if things don’t go your way and depending on how your LLC is viewed by the state in which you are doing business, you very well could. I use LLC’s to limit my personal liability and if that benefit is not there, well that kind of defeats the purpose. Make sure to check into this or speak with an attorney about how LLC’s are treated in your state.
  • The Tax Man Cometh! Some states require what is referred to as a franchise tax that you must pay in order to maintain or have an LLC. You can think of this as a “pay to play” type scenario. Many states have this fee and it is important to consider this before you get started. Can you afford a couple $100 in fees? That could also be a good benchmark to decide if you really are ready to start a business. If a few $100 will wipe you out, then chances are you are not ready.
  • Loans can be hard to come by. If you are thinking you will need traditional funding from a bank then you may want to consider your options. The liability aspect goes both ways. If your business account has $5 in it and no real assets for collaterall, there isn’t much for the bank to collect on if things go sideways. Just something to consider. LLC’s can be more challenging when you are trying to raise traditional capital.

 

I let time get away from me on this one!  I’ll be back next week with the details on setting up an LLC!

Are you thinking about starting your own business? I know many of you have already! For those who have, what was your experience, have any advice for our members? What was your outcome? Are you happy with it? Let me know in the comments or shoot me an email at info@wendypatton.com to share your business structure story.

Until Next Time! To Your Success!

Wendy Patton

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