Owning real estate can be a risky proposition. There is the potential for loss and liability, impacting your personal net worth. If you intend to own real estate for business purposes, you can minimize this impact by forming a real estate holding company. A holding company allows you to own real estate while protecting your other assets.
A holding company acts as a platform for owning real estate in such a way that it is isolated from other assets in your possession.
The Basics of Holdings Companies
A real estate holding company is formed for no other reason than to own real estate. You form an entity -- the holding company -- so that the contract and ultimately the deed will be in the company's name. Additionally, if you seek financing, you will pledge the mortgage under the name of the real estate holding company.
Exploring Company Structure
Many real estate holding entities are structured as limited liability companies, known as LLCs. An LLC affords you the protection of a business entity, but allows you to claim the income on your personal tax return. To create an LLC, you must file a certificate of formation, also known as articles of organization, with the state you plan to operate in. This involves paperwork and a fee, which can range from about $50 to $200.
In most states, you must renew your LLC each year, paying a nominal fee. You also apply for a tax ID number with the IRS. Additionally, if the real estate holding company will be made up of additional members, you want to draft an operating agreement detailing the management of the company.
Benefits of LLCs
An LLC is beneficial in that it protects your business. For example, say you open a small hardware store. You name the store, known as the operating company, “Hammers and Nails, Inc.” You want to purchase a property, but don’t want to expose the operating company to the potential liability risks.
To protect Hammers and Nails, Inc., you form a real estate holding company, named “Hardware House, LLC” and purchase the property in the name of that entity. Now, if there’s an accident on the property, Hardware House, LLC is liable and you will assume the cost, but the injured party can’t take action against Hammers and Nails, Inc.
Understanding the Risks
While a real estate holding company has definite tangible benefits, it also comes with risks. There are costs involved, including registration and business taxes. Additionally, a holding company requires a level of management that can be daunting for an inexperienced business owner. This is why it is a good idea to retain the services of an attorney when creating and managing your real estate holding company.
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