Posted on: 8 January 2020Share
When you buy real estate as an investment, you need to protect your financial investment as much as possible. One way that many real estate investors do this is by creating a special purpose entity or special purpose vehicle. This separate business entity distances your personal finances from the business obligations so that your risk is vastly reduced.
But in order to receive the legal protections you want from your special purpose entity, you must take a few steps. What are some of these steps? Here are three of the most important.
1. Separate Business Expenses
In order for a business entity to be considered as a distinct and separate entity from the individuals who own and operate it, income and expenses must not mingle. If you pay for personal dinners, your dry cleaning, groceries, or the kids' holiday gifts using company money, then you may cause oversight agencies to believe that you and the company are one.
Paying for personal expenses or injecting personal income directly into your business without the proper paperwork won't cause an immediate problem. But if you declare bankruptcy or are sued for damages, this will likely be discovered and will vastly affect which assets are up for seizure.
2. Plan for Taxes
Different business entities are structured differently, which means that they are taxed differently. If you set up an S corporation, for instance, you may not have to pay self-employment taxes. But an LLC member may be required to do so. This may not sound like a huge difference, but it could add up to roughly 15% in additional taxes when you file Form 1040.
Before selecting a business type, work with an experienced accountant to assess the tax implications of each. Lower tax rates may not be the only determining factor. For instance, loss limitations may be a bigger issue if you expect not to earn a profit for a few years.
3. Learn About Obligations
Filing as a corporation, trust, or partnership all come with unique tax and accounting obligations. Each type of business entity has its own unique set of annual tax forms. Some business tax forms and taxes will be due on a quarterly, annual, or semi-annual basis. And corporations, trusts, and other businesses must often file additional paperwork or renew their status with state agencies each year.
As an owner of a special entity, it is ultimately your responsibility to follow these mandates. You will be the one who receives fines and penalties for failure to do so. So, work closely with a CPA to understand what must be filed at what time and how to do so.
While some of these responsibilities do add some complexity to running your business, the added financial and legal protection you receive will be worth it. Start today by meeting with a business tax accountant in your area.