SBA & You: Structuring Your Real Estate Investment Business

Are you ready to grow as an investor and get serious about your real estate business?

One of the absolute best resources available to you as you navigate starting or expanding your business is the U.S. Small Business Administration (SBA). They have compiled and provided an impressive array of information that can help you save money, protect you from lawsuits and determine the appropriate legal structure for your business.

This immensely valuable trove of information is available for free to all, and combined with the help of business planning and legal professionals, you will be as informed as you possibly can be when making decisions for your new business.

What Is The SBA?

The SBA, formed in 1953 under the Eisenhower administration, is a federal agency that serves as a repository of information and resources for small businesses, both new and established, throughout the United States of America.

The SBA classifies a “small business” as any one with a net worth of less than $7 million and net profits of less than $2.5 million, so many real estate investors would qualify for the counseling, resources and even funding they provide to small business owners.

Financing Through The SBA

Along with the wealth of good advice they have to offer, the SBA is also available to provide loans to help real estate investors purchase commercial real estate. These loans typically come with longer terms and more competitive rates than your standard real estate loans, making them an appealing and lower stakes way to begin purchasing commercial real estate.

There are limits to what these loans can do, though. The most common ones, the SBA 504 and 7(a) loans, are only available for the purchase or repair of owner-occupied real estate, and only 40 percent of this property can be rented out to tenants.

What is the Correct Structure for Your Real Estate Business?

Without an asset protection strategy for your real estate investment business, you are leaving your personal property vulnerable to lawsuits or seizure if things don’t go according to plan.

Not only that, but the tax benefits that come with structuring your business properly can pay their own dividends in the long run. Each structure can operate differently when it comes to taxes: some business owners file a personal return and pay self-employment taxes while others pay themselves a salary from their own business and then pay tax on the profits.

The best way to navigate the pros and cons of this decision is with the help of a legal services provider or a CPA.

Four Options for Structuring Your Business

The SBA details the four paths you can take when building your real estate investment business:

-Sole Proprietorship
-Partnership
-LLC
-Corporation (S-corp or C-corp)

Sole Proprietorship
While a sole proprietorship is the easiest business structure to establish, it also leaves you with the least amount of protection. Business owners in a sole proprietorship leave their personal assets at risk if the business fails or if there is a lawsuit, so this is almost never recommended for a large or growing business in a fluctuating market like real estate.

Partnerships
Limited partnerships and limited liability partnerships are limited to businesses with two or more owners. Liability varies depending on the structure of the partnership, but at least one partner will have limited liability. American investors are typically better served with an LLC structure but a limited partnership is a good option to explore for Canadian investors as they exist within a different legal framework.

Limited Liability Company (LLC)
An LLC is simply the best, most preferred way to keep your personal assets and business assets entirely separate and safe. This LLC can then buy and hold properties for investment and, if facing a lawsuit, only put the assets held by the LLC at risk.

There are four types of LLCs, each one facing a different tax situation, so it’s important to choose the appropriate LLC for your investment business.

Corporations (C-Corp and S-Corp)
The primary difference between an LLC and a corporation is in how they are taxed. Like an LLC, a corporation is a separate entity holding its own properties and assets which are separate from the owners. If debating between the merits of an LLC vs a corporation, it’s highly recommended you speak to an expert to make an informed decision.

Is Your Business Ready to Launch?

Choosing the right structure for your investment business is only one tool in your asset protection toolbox. If you are new to this business or ready to grow your real estate investment portfolio, it’s important to seek the advice and counsel of legal experts. This country is a litigious one and failure to do so could leave you, your family, and your personal assets at risk.