Investment company setup

These eventualities are not covered by the policy and are one of the reasons why you should always incorporate your business to protect yourself. For instance, black mold is almost never covered by insurance policies, but is a common problem for property owners. In addition, realtors understand the market within a given geographic area better than you ever could. Your goal should be to find the worst houses in the best neighborhoods and spruce them up to reap the biggest rewards.

It seems wise, at least on the surface, to start small and grow bigger in the real estate business, but this may not always be the best option. Generally, single unit rental properties and small single family homes are the most attractive to newbie investors, as they usually cost less to purchase. However, the profit from these properties is often swallowed up by the mortgage, renovation budget, and maintenance on the properties.

As a result, it may be a better idea to partner with a wealthier individual or to secure more financing in order to purchase a more profitable property. Take this — and all of the other factors described above — into consideration before signing on the dotted line of your first investment property. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform.

Before founding UpCounsel, Matt practiced as a startup and business attorney. California Gov. Jerry Brown recently completed acting on the 1, bills that came across his desk this year. He has signed 1, of them into law, with the majority taking effect GDPR requires process and technology changes across many functional areas.

UpCounsel attorney Michael Witt Click here for advice for founders. They are now often used as a tool to reduce personal exposure to monetary and legal risk. Through a holding company, owning investment properties is also known to create significant tax benefits , and ease of administration when compared to other legal entities. While real estate holding companies are not the only way to protect a business, most investors find the benefits to be the most accommodating. In other words, if you want to learn how to start your own business, it could not hurt to look into forming one for your protection.

A real estate holding company is typically a great choice for short-term and long-term investors. Holding companies are relatively inexpensive to start, and the benefits generally outweigh the cost and upkeep to maintain them. Holding companies do pay taxes, though they can vary slightly depending on the organizational structure. For example, a holding company with one business owner will typically be treated as a sole proprietorship. This means the entity itself is not required to file with the IRS, and instead, owners will need to report all profits or losses in their tax paperwork.

On the other hand, a two-person LLC will be treated as a partnership. This means each owner will be responsible for paying taxes on their share of the returns. For more specific information on how a holding company is taxed, be sure to consult a professional with any questions. For real estate, the subsidiaries will typically be investment properties. The holding company itself will not have a hand in day to day operations of each property but will instead serve as a parent company.

There are several benefits to utilizing this structure, which we will discuss below. Register for our FREE real estate webinar , where you can learn how to replicate successful business systems from expert real estate investors.

An example real estate holding company may help illustrate what this business structure would look like. After I follow the necessary protocol filing with the state, paying fees, etc. I decide to purchase an investment property. In this case study, I now want to move that property into my newly formed LLC. To do so, I would obtain a deed, file the necessary paperwork, and then transfer the property ownership. I would also update any documents that need to reflect the change in ownership, like tenant agreements and leases.

As an owner, I would be responsible for oversight and support. While this is an oversimplified example, it can serve as an overview of what a real estate holding company might look like. Setting up a real estate holding company has become increasingly popular in the last decade, and for good reason.

By incorporating their businesses, real estate investors can gain access to unique benefits and enhance the long-term health of their businesses. Real estate holding company benefits include, but are not limited to, the protection of investors from personal liability, pass-through taxation, and the building of credit for your business.

Holding companies can protect business owners from liabilities and debts incurred by their properties. Furthermore, those wondering how to set up a real estate holding company will be pleased to find out that they are relatively easy to register. The sections below will expand upon each of the main benefits, along with some of the lesser-known perks.

Investing in real estate is a rather lucrative career choice. Traditionally, there is a lot of money involved in every deal—at least more than the average individual can cover on their own accord. Having said that, it is absolutely imperative for respective investors to protect their personal finances those outside of their business finances.

First and foremost, LLCs limit personal vulnerability to potential lawsuits related to the property, which is perhaps the most intriguing aspect of starting a holding company. Any lawsuit against an LLC is aimed specifically at the company, not the individual responsible for it.

In other words, personal finances would not be in jeopardy. Assuming liability coverage is the most important factor in forming a real estate holding company, taxes are a close second. In fact, some real estate investors consider framing their business structure as an LLC based solely on tax benefits.

Liability protection may be a bonus to some. A court ruling enabled real estate investors to avoid double taxation by acquiring property through LLCs. However, the respective owner still enjoys protection against liability. It is the best of both worlds.

Seeing as how there is no separate tax accompanying the formation of an LLC, business owners are in a position to avoid double taxation. Neither the rental income generated by a property nor the appreciation in value upon disposition incurs tax penalties.

Additionally, the owners of a single-member LLC can use mortgage interest as a deduction around tax time. In forming an LLC, you are not only subjected to fewer taxes, but you are awarded more deductions. However, real estate companies owned by more than one person are viewed differently in the eyes of the IRS.

Multimember LLCs also enjoy the benefits of pass-through taxation as the LLC passes its profits and losses through to its members. Each respective owner is then responsible for reporting their share of the profits or losses on either a Schedule C, K, or Form with their individual income tax returns.

As the owner of a real estate holding company, single-member or multimember, you are entitled to pass-through taxation benefits. Again, all of these tax benefits are in addition to the liability protection shield that was previously discussed. Real estate holding companies came to prominence approximately 10 years ago, as real estate investors were made privy to the upsides they offer.

However, there is more to this designation than meets the eye. Real estate holding companies are relative to other legal entities that, while not unique, apply to the use of LLCs when holding real estate assets. Those perks include, but are not limited to the following:. Ease Of Management: The structure presented by an LLC makes delegating management responsibilities and positions a lot easier. Whereas a corporation is statutorily required to have officers and directors, LLCs are free to be managed by their owners, or even a third-party.

Cost: There are a lot of states that impose additional fees on the authorized number of shares a company has. While LLCs are still subject to these fees, they may pay less than corporations. Draft your own business plan. The business plan will help you clarify what you hope to achieve with your investment company and how you intend to reach your goals.

A business plan will typically contain the following information: Company summary. Describe the services you will offer and your business type.

Identify the amount of capital you will have at the start and your total start-up expenses. Identify the other investment companies you will be competing with and analyze what they do well. Discuss how you will set yourself apart from the competition. Marketing plan. Identify your target consumer based on age, location, gender, education, income, etc. Discuss what promotional efforts you will undertake to reach your target market. Operations and management. Identify the members of management and discuss their experience and education.

Financial information. Create projected cash flows , balance sheet, and business ratios. Part 2. File paperwork with your jurisdiction.

Generally, there should be printed, fill-in-the-blank forms you can use. You'll need to provide basic information about your company, such as its principal place of business, registered agent, and the name of one or more directors or incorporators. You'll also need to pay a filing fee, which will vary depending on your jurisdiction. You might be able to register online, which can speed up the approval process.

Create an operating document. You'll need rules in place for running your investment company. You should find sample documents from other investment companies. These documents will explain who can make business decisions and how. Typically, you don't file these documents. Instead, you store them at your principal place of business. If you form a corporation, you'll need to draft bylaws. In your bylaws, you should discuss how people can be appointed as officers or board members. Also explain how shareholder or board of director meetings can be called.

Your agreement should explain the ownership percentage and how profits and losses are allocated. You also want to clarify who can bind the partnership and what will happen if a partner dies.

If you form a LLC, you'll need to draft an operating agreement. This document will be similar to a partnership agreement. Identify the owners and their percentage of ownership. Also divide profits and losses. Acquire required licenses. Investment advisors typically need one or more licenses to practice in their jurisdictions. You should thoroughly research the requirements and give yourself enough time to pass the written exams.

To obtain it, you'll need to pass a three-hour exam on basic securities laws and ethics. Register with the government if necessary. Talk to your lawyer about your registration requirements. In the United States, you'll need to register with your state and the federal government. You can find your state's securities regulator online. Learn about federal government registration by reading the Investment Company Registration and Regulation Package, which is available online.

Create an account to trade. You'll need this account to buy and sell stocks. Open the account in your business name, not your personal name. Obtain tax IDs to pay taxes in your jurisdiction. Contact your state's Department of Revenue and your municipal government office. Part 3. Target your expected client. Sophisticated clients will need a different approach from novice investors.

For example, novice investors might be embarrassed by what they don't know and afraid to ask questions. This fear might prevent them from doing business with you. Your target market will also drive the media you choose.

For example, if you want to reach established professionals, you might advertise in the business section of the newspaper. However, if you want to reach millennials, you should advertise online and use social media.

Video is more effective at reaching millennials than text. Brand your company. Your brand is your business identity. It is the collection of emotions or experiences your clients will associate with your business. Spend time coming up with a consistent branding strategy. Create a logo and tagline that convey your brand.

Your website, printed materials, and business cards should share the same look, color scheme, and feel. Create a website. Today, all potential investors are web savvy. You'll need a web presence, if only so that interest clients can get a good overview of your company.