Creating a real estate holding company has evolved into a time-honored tradition for today’s most successful entrepreneurs. If nothing else, there are few vehicles capable of safeguarding a new business owner against both their malice and that of others.
First-time business owners may find a real estate holding company intimidating like Kingdom Valley, and with reason. A holding company is a legal structure upon which will build your entire business. However, it is worth noting that starting one is not as daunting as it may appear. While this is a necessary component of starting a business, this does not mean you should be intimidated. Rather than that, investors should exercise caution and take advantage of the numerous benefits that a holding company can provide.
How can you define a Real Estate Holding Company?
A real estate holding company is a legal entity created to safeguard business owners against the risks associated with investment property ownership. Real estate holding companies, also known as limited liability companies (or LLCs), do not engage in business operations but rather own various assets. The purpose of this structure is to effectively shield business owners from personal liability for debts or other obligations incurred by the entity, hence the term “limited liability.”
Although LLCs were enacted in the 1970s, real estate investors have only recently appreciated their benefits. They are now frequently used to mitigate personal exposure to financial and legal risks. Owning investment properties through a holding company is also known to provide significant tax benefits and ease of administration compared to other legal entities.
While real estate holding companies are not the only way to protect a business, the benefits are most appealing to most investors. In other words, if you’re interested in learning how to start a business, it might be prudent to consider incorporating one for your protection.
Services requirement for a Real Estate Holding Company
A real estate holding company is frequently an excellent investment for both short- and long-term investors. Any real estate investor can benefit from safeguarding their assets against business liabilities, and it’s also prudent to keep real estate income separate from personal income. Holding companies are relatively inexpensive to establish, and the benefits typically outweigh the costs and maintenance associated with their maintenance. Notably, you do not need to form an LLC if you are purchasing a primary residence.
Are Holding Companies Taxable?
Taxes are paid by holding companies, though they vary slightly depending on the organisational structure. For instance, a holding company with a single proprietor is typically treated as a sole proprietorship. It means that the entity is not required to file with the IRS and that owners are responsible for reporting all profits (or losses) on their tax returns. On the other hand, a two-person LLC will be treated as a partnership. It means that each owner will be responsible for taxation on their portion of the profits. Consult a taxation professional for more specific information on how a holding company is taxed.
Structure of a Holding Company
The holding company’s structure will generally look as follows: the holding company or LLC will be at the top, with individual subsidiaries below. Typically, in real estate like 7 wonder city, the subsidiaries will be investment properties. The holding company will not be involved in the day-to-day operations of the properties but will act as a parent company. There are several advantages to utilising this structure, which we will discuss in greater detail below.
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Example of a Real Estate Holding Company
A real estate holding company may illustrate this business structure. In this example, I’d like to form a Limited Liability Company (LLC). After following the necessary procedures (filing with the state, paying fees, etc.), I decide to purchase an investment property. The property will be owned by Business Holding Company, LLC, and managed by a property manager.
As an example, suppose I acquired an apartment complex before forming Business Holding Company, LLC. In this case study, I’d like to transfer ownership of that property to my newly formed LLC. To accomplish this, I would obtain a deed, complete the necessary paperwork, and then transfer ownership of the property. I would also update any documents that require updating, such as tenant agreements and leases.
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I now own two properties through Business Holding Company, LLC. The holding company’s balance sheet would then reflect the sum of its operating income, liabilities, and return on invested capital. As an owner, I would be in charge of supervision and support. While this is an oversimplified example, it illustrates the structure of a real estate holding company.
Why Should You Establish A Real Estate Holding Company?
Establishing a real estate holding company has grown in popularity over the last decade, and with reason. Real estate investors can access unique benefits and strengthen their businesses’ long-term viability by incorporating their businesses. Benefits of a real estate holding company include, but are not limited to, investor protection from personal liability, pass-through taxation, and credit building for your business.
Holding companies can ensure business owners against the liabilities and debts associated with their properties.
- A holding company protects investment properties from double taxation.
- The business structure enables investors to manage their properties more efficiently.
- In general, LLCs pay less in fees than corporations.
- Holding companies give investors greater discretion over how their profits are distributed.
- An investment trust enables investors to acquire real estate in the United States and abroad.
- A holding company more easily than other entity types.
Additionally, those interested in learning how to form a real estate holding company will be pleased to learn that they are relatively simple to register. The sections below will discuss each of the significant benefits in greater detail, as well as some of the lesser-known perks.
As a real estate investor, one should be capable of understanding that your industry is risky. Without being overly pessimistic, there is no way to eliminate the risks of starting a real estate investment company. However, with the appropriate education and legal designation, you can effectively mitigate much risk. As a result, adhering to the formalities established by an LLC will protect your business from a variety of threats.
After reviewing the fundamentals, you should have a firm grasp on the advantages of forming a real estate holding company, how they compare to other legal entities, the distinction between an LLC and liability insurance, and which option is best for your business. Once you’ve determined that establishing a real estate holding company is the best course of action for you, review the general steps to ensure that your business is up and running (and protected) in no time.