Entity Choice for

Real Estate Investors

Presented by
Alfonso Zambrano
© 2017 Brown & Fortunato, P.C.
 Disclaimer
 The following presentation includes generalized information. Choosing an
entity for your real estate investment or business will require you to make a
choice depending on the specific facts of your situation.
 Contact your attorney and CPA to set up the best structure for your business.
 I am not a Tax Attorney, CPA or Financial Advisor.
 I am only licensed to practice law in Texas.
 Choice of Entity
 The greatest advantage to choosing a legal entity to set up your business is
that you will not be personally liable for the debts and claims of the business.
Choosing a legal entity will protect your personal assets.
 Real Estate is a “HOT” asset.
 Insurance is not always enough. LeBron James example.
 Types of Ownership Structures

 Sole Proprietorship
 General Partnership
 Limited Liability Partnership
 Limited Liability Company
 Corporation – “C” or “S”
 Sole Proprietorship
a) Advantages
1) Simple to create. No state filing required.
2) Simple to manage. No mandatory meetings, you are the only
person who can legally obligate the business.
b) Disadvantages
1) UNLIMITED personal liability.
2) Ownership Restrictions: There can only be one sole proprietor.
3) Automatic dissolution upon death or departure of the sole
proprietor.
4) Difficult to sell to a potential buyer because he or she may not
want personal liability.
5) Subject to self-employment taxes.
6) Increased IRS examination risk.
 General Partnership
a) Advantages
1) Simple To Create. No state filing required. A partnership agreement is
recommended, but not required. Meetings are not required.
2) Flexibility in Management Structure. Any general partner can make
management decisions.
b) Disadvantages
1) UNLIMITED liability of general partners.
2) Subject to self-employment taxes.
 Limited Partnership (LP)
a) Advantages
1) Limited liability for limited partners.
2) Centralized management. Any general partner can make management
decisions.
b) Disadvantages
1) Unlimited liability for general partner(s). However, the general partner(s)
of an LP can be a legal entity.
2) Must file with state. Filing fees are $750.
3) Must keep up with formalities in order to avoid piercing the corporate veil.
4) Subject to self-employment taxes.
5) Could be difficult to receive financing.
 Limited Liability Company (LLC)
a) Advantages
1) Limited liability of members.
2) Flexibility in organizational and management structure. Can structure as
member-managed or manager-managed.
3) Texas allows single-member LLCs.
4) Choice of taxation.
b) Disadvantages
1) Articles must be filed with the Secretary of State. Filing fees are $300.
Certain records are required to be maintained.
2) Must keep up with formalities in order to avoid piercing the corporate veil.
3) Could be difficult to receive financing and subject to self-employment
taxes if LLC is taxed as a disregarded entity.
 “C” Corporation

a) Advantages
1) No personal liability of shareholders.
2) Corporation continues upon death or departure of a shareholder.
3) Easier to get financing for your business because your lender will look at
the corporate tax return, not your personal tax return.
b) Disadvantages
1) Inflexible management structure.
2) Must file with the Secretary of State. Filings fees are $300.
3) Must keep up with strict formalities, such as required bylaws and annual
meetings, in order to avoid piercing the corporate veil.
4) Double taxation (taxed at the corporate and individual level).
 “S” Corporation*
a) Advantages
1) No personal liability of shareholders/members/partners.
2) Single level taxation, no double taxation as with a “C” Corporation.
b) Disadvantages
1) Most likely will have to file with the Secretary of State. Filings fees are $300.
2) Must keep up with formalities in order to avoid piercing the corporate veil.
3) Ownership restrictions: No more than 100 shareholders/members/partners;
no domestic or foreign entities or nonresident aliens allowed.

* An “S” Corporation is NOT an entity at all, but the name by which a

method of federal income taxation is described. This method of federal
taxation may be used by four forms of Texas entities: corporations,
professional associations, limited liability companies,
and general partnerships.
 Choosing the Best Entity for
Your Real Estate Business
 Buy and Hold: Typically an LLC will be the best entity because rentals in LLCs
get many tax benefits and are cheaper and easier to run than a LLP.
 Flippers: Typically an LLC will be the best entity. A flipper will want to
consider his or her tax implications and whether it is best to be taxed as a
disregarded entity or as an S Corporation.
 Wholesalers: Typically either an LLC taxed as an S Corporation or an S
Corporation will be the best entity choices.
 Property Management Companies: Typically either an LLC taxed as an S
Corporation or an S corporation will be the best entity choices.
 Contractors: Typically either an LLC taxed as an S Corporation or an S
Corporation will be the best entity choices.
 Multiple Real Estate Activities

 If your company is participating in multiple real estate activities, you will

want to separate entities in order to minimize your liability and tax
implications, depending on the activity.
 For example, create one entity for active investing (wholesale and rehab
flips) and another entity for passive investing (rentals, owner financing, and
lease options).
 This allows your passive investment activities to enjoy the many tax benefits
offered by the IRS.
 Why LLCs Are Often Used by
Real Estate Investors
 LLCs have many benefits, including:
o Low formation costs.
o Limited liability.
o Flexibility in management and ownership structure.
o Choice of tax implications.
 General Tax Information

 Active v. Passive Real Estate Investing

 Single v. Double Taxation (i.e., Corporations)
 Employment and Self-Employment Taxes
 Employee taxes such as federal income tax,
FICA, and FUTA
 Going into business with your spouse
 Self-employment tax
 General Tax Information

 Tax Elections:
 For Subchapter C taxation, the available entities include: corporation,
general partnership, limited liability partnership, and LLC.
 For Subchapter S taxation, the available entities include: corporation,
general partnership, and LLC.
 For Subchapter K taxation, the available entities include: general
partnership, limited liability partnership, and LLC.
 For disregarded status, the only entity is an LLC with a single member and
the non-entity of sole-proprietorship.
 General Estate Planning Information

 Using an LLC or LLP can allow you to set up certain

structures to transfer your assets to your heirs to

avoid taxes and maintain control until you are ready

for your heirs to receive the assets.

 Sole Proprietorship General Partnership Limited Partnership Limited Liability C Corporation
Company

Personal Liability Sole proprietor is General partners are General partner(s) is(are) Limited liability Limited liability
personally liable personally liable personally liable. Limited
partners are not
personally liable.

Who Can Legally Sole proprietor Any general partner Any general partner, not In member-managed, any Officers and Directors
Obligate the limited partners member. In manager-
Business managed, any manager

Responsibility for Sole proprietor General partners Any general partner, not In member-managed, any Board of Directors and
Management limited partners member. In manager- Officers
Decisions managed, any manager

Ownership Only one sole proprietor At least 2 general partners At least 1 general partner Texas allows single Texas allows one or
Restrictions and at least 1 limited member LLCs more shareholders
partner
 Sole General Partnership Limited Partnership Limited Liability Company C Corporation
Proprietorship

Start-up and No state filing; no No state filing; Must file Form 207 (Certificate Must file Form 205 (Certificate Must file Form 201
ongoing meetings required partnership of Formation) with Secretary of of Formation) with Secretary of (Certificate of
formalities agreement State; Filing fee is $750; Few State; Filing fee is $300; Few Formation) with
recommended, no requirements regarding requirements regarding Secretary of State;
meetings required mandatory recordkeeping mandatory recordkeeping Filing fee is $300;
bylaws and annual
meetings required

Limits on Can sell business to A partner may A partner may transfer all or An assignee of a membership Transfers may be
Transferability of another, but may transfer all or part of part of the partner’s partnership interest in an LLC is entitled to limited by agreement or
Interests be difficult due to the partner’s interest become a member of the by securities law
personal liability partnership interest company on approval of all the
risk company’s members

Effect of Death Automatic A partnership If there are no remaining
or Departure of dissolution continues after an general partners following
Owner event of withdrawal. withdrawal of a general partner,
the partnership may be
reconstituted. A limited partner
may withdraw from a LP only at
the time or on the occurrence of
an event specified in a written
partnership agreement.
A member of a LLC may not Corporation continues
withdraw or be expelled from
the company. Termination of
the last remaining member will
cause LLC to wind up unless
representative or successor
agrees to continue the LLC

Taxation of Individual tax rate Individual tax rates Individual tax rates of general Individual tax rates of members Corporation profits
Business Profits of sole proprietor of general partners and limited partners unless LLC elects corporate taxed at corporate
taxation rates; dividends taxed
at individual rates of
shareholders = double
taxation
 Summary
 Every business is different. The way you choose to structure your business should be
developed with your specific business activities, purposes, and organization in mind.
 Contact your attorney and CPA to help structure your business in a way that will
give you the most benefits.
 Implications to consider when structuring your business:
o Do you have employees?
o How many owners do you have?
o How many properties do you own?
o What is your risk tolerance?
o What sorts of investment activities will your business participate in?
o What management style do you prefer?
o What are your goals for the future of your business?
o Estate planning needs/goals?
o Exit strategies?
 Alfonso Zambrano
Brown & Fortunato, P.C.
Tel: (806) 345-6354
Email: azambrano@bf-law.com
LinkedIn: https://www.linkedin.com/in/azambrano1