There are many entities available to choose from, and which one is the best choice depends on your specific goals.
There are 4 basic types of entities:
- Corporations – have been in existence at least since the 1790s. They may be comprised of a single shareholder, in which case that person is its director, president, and secretary. Selecting how to be taxed, as an S Corp or C Corp, is a discussion to be had with a CPA. Choose wisely as hidden tax benefits or implications may exist.
- General Partnership – the simplest form of unincorporated organization and governed under Chapter 152 of the business organization code. No need to file any governing documents, however, a written agreement is strongly suggested.
- Limited Partnerships – formed when two or more partners unite to conduct business in which one or more of the partners may be liable for the partnership’s activities; Wisely electing who will act as the General Partner, whether to form an entity to act as the General Partner are some considerations to make. (Chapter 153 of the TBOC)
- Limited Liability Company – Combines the tax benefits of a partnership with the limited liability aspects of a corporation. It provides owners with limited liability and flexibility in the management of a partnership. New to the landscape are Series LLCs.
Working with your CPA or Lawyer can be beneficial during the start-up stage of your business. Answering some of these basic questions with the input of an attorney and/or CPA can save a lot of time, money, and costs associated with any litigation.
Questions to consider before choosing an entity type for your real estate investment business:
- Is the goal to purchase and make a quick sale or to hold long term?
- Are you buying a single property or multiple investment properties?
- How many people will be involved in the venture?
- Who will manage the operations?
- Who is putting in the money?
- Are you raising capital before, or after you form the entity-?
- What kind of financing is contemplated?
- Hard money loans or traditional lender financing?
LLCs are the most frequently formed entity in Texas because of ease of management, sales and ownership flexibility, and if followed properly liability protection.
So, do I need one LLC for every real estate investment property I own?
That depends on your strategy. Are you buying and holding for a longer period? Are you buying, rehabbing, and selling? Are you buying and packaging these properties to sell in bulk? The answers to these questions can factor in deciding how to structure your business. If the strategy is a buy and hold, then having multiple properties in a single LLC may not be the right structure. If your potential buyer is looking to purchase the entity, having multiple properties within the same LLC would make this somewhat complicated. One LLC and one property might be preferable.
Are there other solutions available? Introducing the Series LLC
The Series LLC is the new kid on the block. Introduced in Texas in 2009 under Section 101.601-101.621 of the TBOC, series LLCs allow for different types of businesses to be operated under an umbrella LLC with units acting as series under the LLC.
Series LLC Characteristics
- Umbrella LLC has series or cells underneath the Umbrella.
- Each unit may have its members, managers, governing board (although they can be the same).
- Each unit can have its assets, liabilities and business purposes or investment objectives.
- Each unit is, by statute protected from debts and liabilities of other separate units including the umbrella LLC.
- Obligations, debts, or liabilities of the parent cannot be enforced against the other units.
Series LLC Precautions
Each unit must stand independently on its own. In other words, making sure corporate formalities must be maintained to garner the protections outlined in the statutory framework. Comingling of assets could unwind the units allowing a skilled lawyer to move to pierce the corporate veil. Only recognized in a limited number of states.
Series LLC Advantages
- One filing
- Less or potentially less in legal fees
- One franchise tax return (but confirm with your CPA)
- Easier to govern and navigate corporate formalities
- Easier to sell the entire investment holdings
- Each unit can have a different business purpose, or in the real estate case, a different property
- Each unit can have its allocation of distribution of profits and losses
- Debts and obligations of the parent cannot be enforced against the assets of the individual units.
Other considerations for Series LLCs
How will foreign jurisdictions that do not have series legislation treat a Texas LLC series? Presumably, not well. What this means is that if you are purchasing a property outside the state of Texas, or conducting business outside the state, a series LLC may not be the right legal entity for your purpose. Consult legal counsel to determine how to proceed.