If you've already found your first Baltimore rental home to purchase and done any necessary renovations on it, you might feel like you're ready to get a renter in place. However, before you go much further, it is essential to take steps to protect yourself and your business from legal actions filed against you.
You also want to create a clear break between your assets and your investment property business. Setting up the right business entity in Maryland is designed to do just that! With the help of a Maryland property management company, you can get insights into which option might be the best for your growing business.
Keep in mind that this information is not legal counsel. We highly encourage you to work with an experienced attorney if you’re not handling this process via full-service property management.
Setting up the correct business entity is essential for navigating your approach to reviews by the Internal Revenue Service around tax time. One key reason for this is that the form of business you establish determines how you will pay taxes on your income from your Maryland rental homes.
The most common options we see in real estate include a Sole Proprietorship, Partnership, Corporation, S Corporation, or Limited Liability Company (LLC). It’s essential to take the time to learn about each one on your own (or with your trusted attorney) to ensure you understand the legal and tax implications.
The answer to this question really depends on the financial goals you have in mind concerning your real estate investments. Each one behaves a little differently and has more or less benefits for investors depending on the type of property you want to hold.
This is the simplest form of business structure. There is no break or distinction between the company and the individual who owns it. In this case, you are entitled to all the profits you earn but also maintain responsibility for all debts and losses. You are also solely liable for your business.
Sometimes called a general partnership, it holds the same basic legal structure as a sole proprietorship. The difference is that there are two or more owners in this relationship. Each person in the partnership contributes to the business and is responsible equally for profits, liability, and losses.
An LLC is much like either of the previously mentioned entities. However, it creates a line between your personal and business liability. Those in this legal entity are not 'owners' but are considered 'members' of the LLC.
There are several types of corporations. Some are set up to be used to allow the business to sell stock to others. Others are a tax-exempt structure. Close corporations are those that do not allow public access.
Unless you plan for your real estate empire to reach epic proportions, you likely won't resort to a corporate business entity.
It does cost a bit of money to set up your business entity, depending on the type you choose. However, once you do this, you gain several key benefits to having a legally defined and protected business. Some of those benefits include:
The business entity you select can help you to make money but also help you to avoid losses. It can even help you offer your renters a more professional image. They know they are working with a legitimate company—not just a person that owns the property.
Of course, you can also help further that image when you work with professional Maryland property management services and a capable attorney to select the correct real estate entity.
While your Rent Estate™ Advisors here at Renters Warehouse can provide some insights and information to help you decide, it is always best to hire a real estate attorney to help you make this decision. That’s because there are numerous consequences to making the wrong decision. This could include:
The list here can go on.
You must consider your unique needs: even the area of Baltimore you are buying real estate in can play a role in the type of real estate entity you put into place! Your Maryland property management team can provide you with insight based on the rental market, but you need an attorney who can pinpoint specific circumstances in your situation that may be best or better for you.
...Settle this crucial matter first. A mistake like this can cost your business significantly. Plus, adding properties to your business entity after purchasing them is more complex than including them during a purchase.
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