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Is an LLC or Partnership Better for Real Estate Investing?

By: Gregg Cohen, CEO, JWB Real Estate Companies
June 13, 2012
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A business structure has a lot more to do with how your money is situated or what financing is used. The wrong business structure can hurt you financially and legally if you are not careful. There are a variety of choices to select when structuring your real estate investment company. The type that you choose will depend on the activities that you invest into as an investor. For sheer simplicity, two popular forms known as a limited liability company and partnership are common structures that are used. Both of these types provide some protection and many ask the question is an LLC or partnership better for real estate investing. You have the option of using a real estate attorney to advise you or you can setup your own structure right on the Internet. 

 

Overview of an LLC in Real Estate

You can be a single person or part of a team when you create a limited liability company or LLC. What you are creating is a separate entity that usually receives liability protection against damage or loss. The main reason that people select an LLC is to protect personal assets. The car you drive, house you own and life you create away from your investment property could be at risk in a liability suit. When you create an LLC or join one, you receive liability protection whether you are a manager or a member.

This protection is unlimited and can be a real lifesaver when faced with a civil claim from a tenant or third party that is injured in or on your investment property. Under an LLC, you can participate in the day-to-day activities of your investment property for tax planning purposes.

 

Overview of Partnership in Real Estate

Most state laws govern the structure of a partnership. Whether you are officially licensed by a state or have a third party agreement, the activities that you participate in can subject you to unlimited liability. A partnership offers no personal protection of your assets away from the partnership agreemetn that you create. A single civil suit could ruin you financially if an injury claim or other dispute was brought against you in court. Tax planning is another issue with partnerships.

Depreciation is one of the benefits of owning a rental property. The cost of the property can be amortized over the course of a loan or ownership period. As a general partner, you would not be able to take advantage of depreciation expense if you participate in the management or operation of your property.

 

Attorney Selection and Future Planning

Dealing with legal issues is frustrating and can be really confusing if you are not a legal expert. It never hurts to get solid advice from an attorney that specializes in investment property real estate. The state that you buy property in should be one that an attorney understands and knows the laws. Contracts are not the same in every state and statutes often change. As a smart real estate investor, ensuring that the attorney that you select understands the law and knows how to plan for your taxable future will help protect you and your business assets. 

 

 

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