I've set up about 20 entities in my entrepreneurial career and many of them early on can be described as “experiments” at best. I didn't really know what I was doing, and I made all kinds of mistakes, ranging from hiring an attorney when I should have done it myself to doing it myself when I should have hired an attorney.
I'd like to see if I can help spare you the aggravation of having to figure this out from scratch.
Here are 5 pitfalls to avoid when setting up your real estate entity.
Mistake # 1: Not Educating Yourself About the Pros and Cons of Different Entities
In many cases, setting up an LLC will do just fine for real estate investing.
But not in ALL cases.
Do you know the pros and cons of LLCs, C-Corps, S-Corps, LPs, or LLLPs? No?
Well, you should.
Because not every situation is the same.
Maybe you're the sole owner in your business for the foreseeable future. Or perhaps you want to create an entity that includes different investors. Or that can own multiple other entities. Or that will have employees and provide maximum tax savings and benefits.
Each of these situations and objectives may require a different entity.
In order to know at least the basics so you can make better business decisions and manage your attorney (if necessary), consider purchasing tax attorney/CPA John Hyre's Entity Selection course:
It teaches you the pros and cons of each entity, how to set it up and how to maintain it. Most attorneys will charge upwards of $500 to do this for you. John's course is only $299, so it pays for itself with only one entity.
Mistake # 2: Not setting up the entity from Day 1
Should you set up the entity now even though you haven't done a deal yet?
My answer is YES. You should set up your umbrella real estate investing entity now. Here's why:
- You can reduce your taxable income IMMEDIATELY with any business-related expenses.
- You get the benefits of asset protection from day 1.
- You look more professional if you're acting under an entity.
For these 3 reasons alone, it's worth setting up your entity immediately. It's cheap and easy to do if you know how.
Mistake # 3: Not Maintaining the Entity
Most real estate investors who set up an entity fail to properly maintain the entity.
“Huh, you mean I need to do something to maintain the entity?”
Yup. You need to do things like have an annual meeting with minutes (even if it's only with yourself) and document major decisions (like buying or selling a house) with resolutions (even if they're only signed by you).
This is important to maintain the corporate shield that your entity provides to you. Otherwise, if you don't and you ever get sued, it's possible that the “corporate veil” can be pierced and you become personally liable (that's very bad).
John Hyre's Entity Selection course shows you what you need to do to maintain your entity. Check it out here:
In the course, John also spends time talking about business practices to minimize liability and avoid getting sued. (That's because John is also a real estate investor and and attorney!)
Mistake # 4: Not Setting up the Entity Yourself
Don't pay an attorney $1,200 to set up a Single Member LLC. Buy a course or book that shows you how and do it yourself. Keep your Operating Agreement to just a few pages.
Keep it simple.
Mistake # 5: Not Knowing When to Hire a Professional
Having just said that, the opposite is also true. Don't try to set up the entity yourself when an attorney should really do it for you. This gets back to Mistake # 1, not knowing about the different kinds of entities, what's involved, and when to hire a professional.
For example, if you're going to do something a bit more complex (like have investors in the deal), definitely have the attorney involved in crafting the operating agreement.
Mistake # 6: Setting up the Entity Too Early
If your plan is to purchase apartment buildings, for example, you'll most likely want to have each property in its own entity. Many newbie multifamily investors make the mistake of forming “123 Main Street LLC” too early, and then the deal never goes to closing.
Time and money wasted.
Instead, sign a contract with “Entity TBD” or “Your LLC Name or Assigns”. Then when you're done with due diligence and you're sure you're going to move forward, THEN have the attorney create the LLC.
The first step in avoiding mistakes when setting up your entity is to educate yourself about the pros and cons of the different entities. In most cases you can set up the entity yourself, and if it's more complicated, you'll know when to hire a competent attorney to help you.
To learn the pros and cons of various different entities for real estate investing and step by step instructions for setting up and maintaining the right entity, check out John Hyre's Entity Selection course:
The course is only $299 (and cheaper if you purchase it with the bookkeeping course). You'll end up spending much more if you let your attorney set it up for you. Or you pick the wrong entity and end up spending much more in taxes.
I wrote a detailed review of this course here and gave it 4 out of 5 stars. If you're a real estate investor and don't have your real estate entity set up yet, then I highly recommend this course as well as a book available on Amazon. Read the review and make up your own mind.
To your success!