1. What’s the Best Corporate Entity for a Real Estate
Investment Business?
Find out what the pros say about the best corporate entity for a real estate
investment business.
Perhaps you’ve been a real estate investor for decades and you’re working within an
older corporate structure. Or maybe you’re a newer investor and want to learn what kind
of corporation makes the most sense for your business. Or maybe you don’t have any
interest in setting up any kind of formal corporate structure and want to do business
under your own name. Whatever your unique situation might be, the kind of corporation
you set up – or don’t set up – will have a huge impact on how much money you end up
sticking in your bank account at the end of the day.
Recently a couple of successful real estate professionals, one a seasoned transactional
real estate attorney and the other a very successful real estate investor, put their heads
together and discussed the pros and cons of various corporate structures specifically for
the real estate investing business. It turns out the best corporate entity varies depending
on what you want to accomplish with your business. Here are a few corporate options to
consider.

2. Limited Liability Corporations (LLC)
An LLC is a legal entity that provides the same limited liability as a corporation with the
tax benefits of a partnership. Many investors like working within LLCs for some very
good reasons:
1. Liability protection – The LLC gives the owner personal liability protection. For
example, in most states if you form an LLC and run it as a separate business
concern you’re afforded the protection of a C Corporation. Meaning the
owner/investor is going to be protected from any claim or personal liability that
results from the day to day running of the business, and any business conducted
or transactions performed on behalf of that company.
2. Tax benefits and streamlined operation – LLCs provide the legal protections of
corporations but are taxed as though they were sole proprietorships. Another
advantage of LLCs is they provide you with a lot of flexibility in operating your
company. The laws for LLCs are newer, whereas C Corporations often deal with
archaic business models that were being used in the 50’s or even earlier. An LLC
will give you the flexibility to structure your company similar to a partnership, but
give you the liability protection. And by working with an accountant you can realize
a lot of tax benefits.
3. Flexibility – The LLC gives you the freedom to run your company as though you
were running it personally as an individual, but it gives you liability protection.
C Corporations (C Corps)
The C Corporation is the corporate structure most commonly used, especially by larger
companies. However, these days many real estate pros consider the C Corp an
unsatisfactory corporate entity for a real estate investment company for a number of
reasons, although there are some positives as well. Here are some pros and cons:
1. Double Taxation – With C Corporations you are paying taxes twice. C Corps are
taxed separately from the company’s owners, as opposed to an S Corporation
which typically isn’t separately taxed. After the C Corp is taxed, any money that
then goes out to shareholders, either as a dividend or a draw, must be claimed
as income by the shareholder and is taxed as such. So essentially the owners
are paying a tax twice.
2. Old stockholder laws – In a C Corporation, the owners are considered
stockholders. Shares of stock are issued to the owners when the corporation is
formed. When you deal with this kind of stock there are a lot of old laws to which
you must adhere.

3. 3. Issues when selling property – If you hold property for a long time in a C
Corporation, like a rental property, it may be harder to sell than if it’s in another
kind of entity.
4. Lots of paperwork – Usually there are annual corporate filing requirements
which vary by state. Sometimes these can be a paperwork headache without
professional help.
5. Reinvestment advantage – While the double taxation issue noted above is a
drawback, a C Corporation provides the ability to reinvest profits in the business
at a lower tax rate.
S Corporations (S Corps)
S Corporations are standard corporations which elect, for tax purposes, to pass income
and losses through to its shareholders. S Corps combine the legal setup of a C Corp
with a tax structure similar to a partnership.
1. Tax benefits – The income, tax credits, and deductions of an S Corp pass through
to shareholders on an annual basis. Meaning income is taxed at the shareholder
level instead of the corporate level. The IRS treats the S Corp as a pass-through
entity. So you have the S Corp election, and income that is earned by the
corporation passes through to the shareholders directly, thus taking out one of the
taxes that occur with a C Corp.
2. Officer’s salaries dilute corporate income – In an S Corp, the officers have to
take a salary, so they get a W-2 every year. Anything the owners take as a salary
is going to dilute from the net income on the profit and loss statement, which
reduces the amount of income for the business to be taxed. You’re paying an
employment tax. You want your salary to be consistent with 40 to 50% of what the
business is earning. If you do that, you can avoid that self-employment tax.
3. K-1 and W-2 forms – The owners of an S Corp get a K-1 form which reveals profit
and loss for their share of the business. They also get a W-2 it they’re taking a
salary. The K-1 is for the profits and W-2 for the salary. A K-1 form is issued when
the S Corp has more than one member. If you’re a single member you can file a C-
1 to your 1040. A K-1 is distributed when there are partners. The salaries are
deducted from the net income of the business before the K-1 is issued, so the tax
liability of the K-1 is reduced by the salaries paid to the owners.
Sole Ownerships

4. A sole ownership, also called a sole proprietorship, is a business owned by one person.
In this type of setup there is no legal distinction between the business and the owner.
The owner controls all the assets, but is legally responsible for all debts and other
liabilities.
1. Owner has total control – The owner gets all the profits from the business (less
any taxes owed) and has total control of the business, including the responsibility
for any debts and losses.
2. Difficult to raise private capital – When it comes to raising private money to fund
your business, the government – whether it’s the federal SEC or your state SEC –
wants you to raise money via a corporation rather than as a sole ownership–d/b/a.
So the federal SEC and the state securities offices, when they issue rulings
regarding in-trust state offerings and federal offerings, don’t want you to raise
money in your own name. They want you to raise money through a legally
established corporation. Meaning all your registrations – whether it’s notice filings,
a state offering where your state wants to be advised that you’re raising money in
that state or doing business in that state, on an intra-state offering or the federal
SEC on a federal filing – need to be done under a corporation. You have to
establish an LLC or a corporation within which you raise money.
3. Difficult to buy property – For the same reasons The federal SEC and state
SECs want you to buy property through a legally recognized corporation and not
through a d/b/a or sole ownership. They know that buying and selling property is
your business, and should operate under the structure of a corporation.
The takeaway
Deciding on which type of corporate entity to use for your real estate investing company
is one of the most important business decisions you can make, so it’s a good idea to
consider your options very carefully. The consensus of the two real estate professionals
noted above seemed to favor the LLC, but you should make up your own mind after
careful consideration of your goals.
About the Author
Josh Cantwell of Strategic Real Estate Coach knows that successful investing in real estate requires the
ability to acquire properties at a discount. Of course, getting this discount often means the property’s in
desperate need of renovations. Tune in to this free podcast to discover the 6 simple steps to EVERY
renovation.
http://www.strategicrealestatecoach.com/simplifying-rehab-process-real-estate-investing-made-easy-
podcast/