What Type Of Legal Entity Should Your Business Be?
You have to determine whether or not you want to be a corporation
, LLC, partnership, sole-proprietorships or something else.
The real estate business requires that you make choices for the long term. If you are starting up now, the decisions you make will determine how things are years from now. Your decisions will determine the taxes you have to pay, who your investors may be, who your partners may be and how the rest of the business world looks at you.
Needless to say your choices are very important.
One of the biggest problems people run into when running a flipping houses for profit business is they dont pay enough attention to some of the details and avoid the paperwork.
A sole proprietorship or DBA is the easiest way to get into business and unfortunately the easiest way to get your personal assets into trouble because it is not whats called a legal entity or legal person.
Were all legal persons but the corporations, LLCs and partnerships you have formed are legal entities. But a DBA or a sole proprietorship is not a legal person.
Working as a DBA or sole proprietorships is a good way to test the waters but it doesnt separate you legally from the risks that you have in running a business. So if God forbid theres a law suit, theres no wall between you and the rest of the world. Your personal assets are at a risk. You could end up losing your home. Thats right, your home could end up being one of the bank repo homes for sale that you are looking to purchase with your private lender funds.
Maybe youre just testing the waters and you dont want to spend a lot of money to form a corporation or LLC. I understand that.
But when you get serious about it to the point where youre looking at buying a property, it is really worthwhile looking at your options. It also makes you appear more professional to your potential private lenders.
Now, its important to understand a few basics about forming a business. There is no federal corporation law. So every state has its own set of laws.
A corporation, LLC and, in most states, a partnership is a legal person. It can sue. It can be sued.
It can buy things. It can sell things. There are differences between Corporations, LLCs, and partnerships which I will be talking about in a few minutes but to get started you have to do this at the state level.
It does not require a lawyer. Dont let a lawyer tell you that you must hire a lawyer. Can it be useful? Yes, but in the right conditions and at the right price. You might consider saving your legal budget for a quality SEC attorney in this case.
But in most cases, youll find that if you go online to your Secretary of State or Department of Corporations, theres a lot of information available for free. Itll tell you about what the filing fees are what the requirements are. Just follow their lead
If youre forming a company in your own state you can be your own registered agent. If you dont want to disclose your home address because youre working from home most states will let you use a P.O. Box or you can rent a virtual mailbox.
by: Alan Cowgill
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