The most successful businesspeople of today often follow in the footstep and structure of their predecessors by establishing a real estate holding company. There aren’t many things that can shield a brand-new business owner from their own mistakes and the malevolent actions of others. First-time business owners may be daunted by the prospect of managing a real estate holding company. The holding is the cornerstone of your legal structure. However, it’s important to remember that getting started isn’t as difficult as it might sound. Although it plays a crucial role in launching a firm, you should not feel daunted by the prospect. Investors shouldn’t overlook the importance of doing their homework and should instead welcome the many benefits a real estate holding company may offer. In this article, we will discuss Real estate holding company names, examples, and how to start one.
What Is a Real Estate Holding Company?
A real estate holding company is a legal corporation formed to insulate business owners from the dangers associated with investing in real estate. A real estate holding company also referred to as a limited liability company (LLC), holds rather than manages its assets. The term “limited liability” refers to the fact that business owners will not be personally liable for debts or other liabilities incurred by the entity.
Although limited liability companies (LLCs) have been around since the 1970s, it is only in the past decade that real estate investors have started to appreciate their advantages. They’ve become a common method for lowering financial and legal liability. A real estate holding company is commonly used to hold investment properties because of the numerous tax advantages they provide and the relative ease with which they can be managed, in comparison to other types of legal entities.
Also, a real estate holding company isn’t the only option for corporate security, but most investors like the advantages they offer the most. To rephrase, it wouldn’t hurt to investigate organizing a business entity if you’re interested in learning how to launch your own venture.
Who Needs a Real Estate Holding Company?
Whether your investment horizon is short or long, you can benefit from investing in a real estate holding company. After all, their primary function is to shield personal assets from legal claims against the company. It’s also a good idea to keep company and personal finances separate.
Real estate holding companies are mostly useful for a select group of real estate investors. For example, investors in fix-and-flip properties, commercial real estate, and passive income should think about establishing a limited liability company (LLC) or holding company (holding company). LLCs also offer additional legal safeguards, which is especially useful for first-time investors.
If you plan to invest in rental homes, fix-and-flip projects, or any other type of real estate, an LLC is a good way to safeguard your investments and your personal assets.
What Is the Purpose of a Holding Company for Real Estate?
A Real estate holding company is good for investors in a number of ways. Incorporating your company allows you to take advantage of certain advantages and boosts your company’s longevity. However, a real estate holding company can shield its owners from lawsuits and safeguard their assets. Here are some reasons to start one.
#1. Simple Administration
While there are a number of other benefits, one of the most significant is the simplicity of administration. LLCs are designed to facilitate the distribution of management responsibilities and the delegation of activities. Unlike corporations, limited liability companies (LLCs) can be run by either their owners or an outside entity of their choosing.
Managing rental properties or forming contracts with the LLCs that own the properties is a popular tactic used by real estate investors. In turn, the LLC in charge of managing the rental property represents the LLC that owns the building.
#2. Restrains Private Responsibility
The formation of a real estate holding company can shield shareholders from legal action. Investors generally agree that property ownership is expensive. It also necessitates handling huge sums of money and making sound financial decisions. Investors should take precautions to safeguard their capital.
LLCs, thankfully, offer the necessary safeguards. A lawsuit filed against a limited liability company (LLC) would be directed at the business entity rather than the owner personally. If the property is owned by an LLC, then the owner’s personal assets would be shielded because the action would only affect the LLC’s property. Therefore, a future lawsuit would have no effect on your own finances.
#3. Reductions in Taxes
The tax advantages of forming a real estate holding company are another major perk. Although liability protection is one of the primary reasons to form an LLC, some investors contemplate doing so solely for tax reasons.
By buying properties through a holding company or limited liability company (LLC), real estate owners can avoid paying taxes twice. The term “double taxation” refers to the practice of taxing the same revenue or financial transaction twice. As pass-through corporations, LLCs are exempt from paying taxes twice.
Because of the way a real estate holding company structure is set up, the owner receives all of the profits and pays taxes on them out of their own pocket. By establishing an LLC, business owners can avoid paying taxes twice. Mortgage interest can also be deducted at tax time for single-member LLC owners.
Real Estate Holding Company Structure
As a real estate investor, the majority of your net worth exists in the form of physical assets, such as houses and businesses. To safeguard your enterprise, guard not only the business’s assets but also your own private holdings. The degree of protection afforded to your personal assets depends critically on the type of legal entity you establish for your company.
When starting a real estate investment business or reorganizing an existing one for legal and tax advantages, there are a number of considerations to keep in mind, such as the size of your personal assets, your debt-to-income ratio, the tax laws in your state, and the financial backing you can expect from other investors.
The limited liability company (LLC)/limited partnership (LP) hybrid is a popular choice among the most successful real estate investors. First, we’ll go through all of your choices when it comes to forming a legal company for your business, then we’ll explain what an LLC/LP hybrid is and why it might be the ideal option for your real estate investment business. When deciding on the ideal structure for your real estate holding company, it is recommended that you speak with a certified public accountant and an attorney.
#1. Investing in Real Estate as a Sole Proprietor
Generally speaking, a “default” business structure is a sole proprietorship, which is formed when an individual does business in their own name without formally establishing the business as a separate legal organization. All company assets and earnings are wholly owned by the sole proprietor, who must report these amounts as part of his or her personal income for tax purposes.
All of a sole proprietor’s income is treated as earned right away, as opposed to the situation in which a company “passes through” to an individual in another legal form. The sole proprietor’s personal property rights extend to all assets acquired by the company and transferred to it.
However, this organizational form’s main perk is how simple it is to launch a company using it. The formation of a sole proprietorship requires no formalities. To become a real estate investor, all you have to do is buy and sell properties. Registration as a sole proprietorship may be necessary by state law, but this is not the same thing as forming a sole proprietorship; rather, it is a formality necessary to meet state requirements. Simply engaging in business constitutes the formation of a sole proprietorship.
It is possible that you will need to register as “Doing Business As” (DBA) if you want to use a trade name other than your legal name when conducting business. In addition, business tax returns are not required. Your business revenue and expenses are reported alongside your personal income.
The downsides of running a real estate holding company as a sole proprietorship are substantial, though. When operating as a sole proprietor, all of your business assets are also your personal assets, making them vulnerable to creditors and lawsuits.
#2. LLC
For its many benefits, a limited liability company (LLC) is a popular business structure among real estate investors. If you choose this option for your real estate holding company, you won’t be personally responsible for any debts or losses beyond what you put into the company. The collateral consists of anything of value that you put up in exchange for a loan.
Those who hold an LLC are called “members” of the company. Your real estate LLC is considered a “single-member LLC” if you are the only member. For tax purposes, a single-member LLC’s company income “passes through” to the individual owner. However, you will not be held personally responsible for the company’s debts, claims, or liabilities beyond the amount you have invested. The formation of a limited liability company (LLC) begins with the filing of articles of organization with the relevant state agency.
Personal assets are only partially shielded by an LLC; if certain circumstances are met, a court will disregard the LLC structure and hold you accountable for claims against the business. To be more precise, a court will disregard the LLC’s structure if (1) there is a “unity of interests” between you and the LLC and (2) doing so is required to prevent fraud or unfairness. “Piercing the corporate veil” describes this practice. Indicators of a “unity of interests” include the mixing of personal and commercial funds or the exposure of the LLC as a shell company. In order to “pierce the corporate veil” and ignore the safeguards an LLC generally gives, the court must first find a unity of interests and then decide that doing so is necessary to stop the sham business from committing or promoting fraud or injustice.
#3. LP
There must be at least two people in order for there to be a limited partnership (LP): a general partner and at least one limited partner. All debts, judgments, and liabilities of the firm will be borne by the general partner, while each limited partner’s liability will be restricted to the amount of their investment. Although limited partners enjoy some benefits, they have no say in day-to-day operations because managerial authority is retained by the general partner.
Companies involved in real estate development that require access to significant capital frequently use limited partnerships (LPs). In this structure, investors take on the role of limited partners, with their assets shielded from the company’s obligations. Capital investors may not have administrative authority, but they often don’t want to be hands-on with the company’s operations either.
Both the financial and legal implications of this organization have pros and cons. Earnings distributed to limited partners (LPs) are exempt from SECA (Self-Employed Contributions Act) tax. Establishing a limited partnership (LP) might be costly, depending on the laws in your state. While limited partners’ personal assets are shielded from commercial liabilities, general partners’ are on the line for anything the company owes.
#4. LP and LLC Hybrid
A limited partnership (LP)/limited liability company (LLC) hybrid is an alternate corporate structure for a real estate holding. An LP, made up of one or more limited partners and a general partner, is the legal owner of the LP’s real estate assets.
The limited liability company (LLC) acts as the general partner and is in charge of running daily activities. As a limited partner, you or your investors are protected from personal liability in the event of company disputes. To rephrase, a general partner’s responsibility is unlimited, whereas a limited partner’s responsibility is restricted to the amount of their investment.
In contrast, the general partner in this hybrid form is an LLC, which provides additional safeguards for the members’ individual assets. An LP/LLC hybrid provides the liability protection of an LP with the personal asset protection of an LLC (serving as a general partner in an LP/LLC hybrid), making it an attractive option for real estate investors looking to form a business entity, especially in states that levy a capital stock tax.
However, this combined method requires more work in the form of additional paperwork and taxes. Whether or not a hybrid LP/LLC structure is ideal for your real estate holding company depends significantly on the specifics of your portfolio and the tax laws in your state.
Real Estate Holding Company Names
Incorporating a company is essential for every serious investor since it provides legal protection and builds credibility for the company’s name. Far fewer investors, however, put in the effort required to formulate the latter.
Too little effort is spent on brainstorming catchy names for real estate companies that would enhance brand recognition and customer confidence.
A catchy name is no guarantee of success for your new real estate agency. Or, perhaps you’ve been told that your initial top priority is to create a list of names for your real estate holding company. Nonetheless, this emphasizes the importance of care when choosing a name. “Your company’s name can make or break future performances because it can really help you stand out in a crowded market. Show your individuality and sense of humor while always remaining trustworthy.
It’s important not to neglect the significance of choosing a memorable name for your real estate firm that conveys the vibe you’re going for. Your brand name is the very first impression you make on potential customers and business partners.
Unfortunately, many real estate investors have learned the hard way that failing to take the necessary precautions might result in a career that doesn’t continue as long as they had hoped. This involves doing things like giving adequate thought to the names you choose for your real estate holding company.
Top Tips For Picking Catchy Real Estate Holding Company Names
You might be curious about the thought process that went into choosing the names of a company you respect in the real estate holding industry. Great real estate holding company names can be dissected to see what makes them so memorable. The lessons you can learn from the elements you select can serve as the basis for the development of a brand name. The following are some of the most important considerations when selecting a name for your real estate holding company.
- Don’t limit the potential of your company by choosing a name that’s too narrow.
- Consider your goals and ideals as a starting point for creativity.
- Verify the trademark availability of your ideas online to avoid duplication.
- Think about how your potential business name will fare on your online presence.
- Order a few mock-ups to see what certain names will look like on your marketing materials.
- Check online to make sure there are no hidden meanings or misunderstandings in your name.
- Try googling your potential name to see how many other results come up.
- Verify that a domain name that accurately reflects your company is available.
- Check popular social media sites to see whether the username you desire is available.
- Consider the name’s success in the next year, five years, and ten years.
- Maintaining uniformity is essential if you already have established clientele or promotional materials.
- Don’t rush to use a catchy moniker or acronym that someone might get wrong.
Examples Of Real Estate Holding Company Names
Here are a few examples to help you get started when thinking of your own unique names for your real estate holding company now that you know what makes a great one. Some of these names may already be in use by other companies; please use them just as examples.
- Sequoia Real Estate
- Blue Sky Realty
- Titan Real Estate
- Landmark Realty Group
- Beacon Homes LLC
- Equitable Property Group
- Pinnacle Real Estate.
How to Start a Real Estate Holding Company
The first thing to do is to establish a legal entity for each piece of property if you haven’t previously. The next step is to incorporate a holding company. To complete the process, an independent Limited Liability Company will be formed to oversee the properties. The company deals with repairs, contracts, renters, and subcontractors. If you need further security, you can always form a trust to hold your companies or engage in equity stripping. Here are the 6 steps to start a real estate holding company.
#1. Research and Pick an Appropriate Business Name
To avoid having to constantly type down the LLC name on leases and tax paperwork, make it brief like you would a real estate firm name. Keep in mind that your limited liability company’s name is also a representation of your brand; use it as an opportunity to think beyond the box.
You may choose to use your own name, the name of an investment firm, or even just the address of the building as the name of your business.
If anonymity is crucial to you, pick a name that won’t immediately give you away. This could be the case if you are a public figure or a landlord with a checkered legal background who prefers to keep that information out of the public eye.
When deciding on a name for your limited liability company (LLC), you must adhere to a few naming conventions. While the specific name limitations for an LLC vary by state, many states do not allow the following.
- Legal standing must be conveyed in the name. For instance, a limited liability company’s name should include “LLC” or some variation thereof.
- A business, financial institution, or insurance provider that isn’t actually named as such is violating the law.
- The name must not contain any profanity.
- Name cannot be used to endorse unlawful behavior.
Investors should pick a name for their real estate holdings LLC that is both memorable and indicative of the company’s brand and offerings. If the name you want is already in use, you can always make some tweaks to make it fit and get it authorized. When deciding on a name, keep in mind that it will serve as the domain for your real estate website.
#2. Consult a Professional Lawyer or CPA
When you want to start a real estate holding company, it may be wise to seek the advice of legal and financial professionals. An attorney can advise you on the best way to establish a real estate holding company since they have both the experience and access to insider information that is invaluable. Lawyers are useful not only when starting an LLC, but also when purchasing, selling, renting, negotiating, and protecting assets in the long run.
However, if you have LLC partners, an attorney can assist you draft an operating agreement tailored to your real estate holding company structure. The operating agreements for an LLC spell out the duties of each member in great detail. To further protect your privacy, they can also file the articles of organization with the Secretary of State on your behalf.
Only a small number of states (including New York, Nebraska, and Arizona) mandate the publication of a notice in a newspaper prior to the creation of an LLC. This book is something your lawyer can help you with.
Given the high cost of starting a real estate holding company, as it’s crucial to maximize that investment. Having a real estate accountant on staff can help you save money on taxes and increase your company’s liquidity. They can even advise you on the optimal rental rate that will allow you to turn a profit.
#3. Amass Your Evidence And Submit An Application
You should submit your Articles of Organization when you have decided on a name for your real estate holding company. An attorney may be useful in this process as well. However, most states’ Secretaries of State provide online paperwork that can be submitted via email or in person.
Furthermore, the Articles of Organization mostly consist of the following:
- A description of the business
- Your business name
- The business address
- Date of incorporation
- Business members associated with the company
Although not needed by law in every jurisdiction, you should also provide a copy of your operating agreement. If you have additional members involved in your limited liability company, you should have an operating agreement that defines how the business is run and highlights the rules of the LLC. If an operating agreement is required, details regarding the LLC’s members must be included. Also, read WHAT IS A HOLDING COMPANY: How They Work.
#4. Acquire All Necessary Authorizations
State laws and licensing necessities for limited liability companies are not uniform. To be sure you’re in the clear, contact the Department of State in your state. LLCs often need a tax registration certificate from the state before they may legally conduct business there. Construction permits and adherence to building codes and zoning ordinances may be necessary if you are a builder or intend to make improvements to your property.
Additionally, if you’re a real estate developer or renovating a property, you may need to get construction permits and comply with local zoning laws and building codes.
#5. Establish Corporate Bank Accounts
You’ll need an EIN in order to open a business checking account. Real Estate necessitates the establishment of a separate company bank account if the owner wants to maintain financial privacy. To shield your personal assets from corporate debts, you must take this step.
Furthermore, investors who want to take advantage of the corporate veil should never use business funds for personal expenses. Create credit cards in the name of your firm and use them just for work expenses. When establishing a business bank account, the Small Business Administration suggests providing the following documents:
- Employer identification number (EIN)
- Articles of organization
- Operation agreement
- Business licenses, if applicable
Investors who are currently customers of a particular financial institution may want to investigate setting up a business account there. Because of your prior dealings with the bank, this option presents itself as the most convenient. But if you need a line of credit for investments, your mortgage lender or their preferred bank may be willing to offer you a discount.
#6. Acquire Real Estate Through Your LLC
After establishing your limited liability corporation (LLC), you will be able to expand your real estate holdings by purchasing additional properties. A title company can help you transfer ownership of properties currently held in your own name to your limited liability business. It’s important to check with your mortgage lender to see if a loan is transferrable before selling a residential residence.
Real Estate Holding Company Examples
The structure of a real estate holding company could serve as an example. For this purpose, I propose forming a Business Holding Company, a Limited Liability Company. Following all of the required steps (registering with the state, making payments, etc.), I’ve decided to buy an investment property. Business Holding Company, LLC will be the owner, and a property manager will oversee daily operations.
Let’s pretend I started Business Holding Company, LLC after buying an apartment building. In this situation, I’d like to transfer ownership of the property to the limited liability company I just set up. I would first secure a deed, then file the appropriate documentation, and then complete the transfer of ownership. I would also revise any leases or other contracts with tenants to reflect the new ownership.
Business Holding Company, LLC now manages two of my properties. In this scenario, the holding company’s balance sheet would include all operating income, liabilities, and return on investment. If I were the owner, it would be my job to provide guidance and assistance. Although simplified, this example should help paint a picture of what a real estate holding company is like.
What Is the Advantage of Holding Company Real Estate?
About ten years ago, the business rose to prominence as investors discovered the value of real estate holding companies. However, this label conceals more than it reveals at first glance. Although not exclusive to LLCs, a real estate holding company have many characteristics with other types of legal formations. The following are examples of such benefits:
- Flexibility. When it comes to divvying up their profits, LLCs give real estate investors a great deal of leeway. LLCs are not subject to the same proportionality requirements as S corporations when distributing cash flows to their members. In other words, a member of an LLC can pay someone for “sweat equity” they’ve contributed.
- Transferable. A real estate holding company is a type of company structure that facilitates the transfer of ownership. Each year, real land can be “gifted” to heirs without a deed being signed. True, taxpayers can circumvent these charges by making a gift of their property.
- Cost. The number of authorized shares in a corporation may be subject to additional fees in some jurisdictions. LLCs are nonetheless liable for these expenses, but they can be less than what corporations shell out. In this way, LLCs save money on state registration and maintenance fees.
Conclusion
In conclusion, you, as a real estate investor, should be cognizant of the dangers inherent in your chosen field. Without being too gloomy, there is no risk-free way to start a real estate holding company. However, if one has the proper credentials and training, one can avoid a great deal of risk. Therefore, your company will be safe from various dangers if you follow the procedures required by an LLC.
The advantages of starting a real estate holding company, how they stack up against other legal structures, the distinction between an LLC and liability insurance, and how to determine which is best for your business have all been covered in this primer. To start your new real estate holding company up and running (and protected) as soon as possible, here are the fundamental steps you should follow if you agree that doing so is a smart idea.
Real Estate Holding Company FAQs
How Do You Make Money From a Holding Company?
A holding company can create revenue by selling assets, collecting royalties, leasing or lending assets, or selling subsidiaries. Also, a holding company can create income from its subsidiaries by investing in dividend-paying stocks and bonds.
Can Holding Companies Own Real Estate?
The primary function of a holding company is to exert management on subsidiary businesses. Real estate, patents, trademarks, stocks, and other assets are all possible holdings for a company.
What Is the Difference Between a Holding Company and an LLC?
LLCs can also serve as holding companies. The sole difference between a holding company and an LLC is that the latter doesn’t do business. Holding corporations don’t develop or produce anything; they just store their subsidiaries’ assets.
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