If you own residential or commercial rental property, at some point in time, you’ve probably wondered whether it makes sense to incorporate. For most small business owners, this involves a corporation or a limited liability company. Establishing a formal entity can help shield your other assets from lawsuit awards.
The question is, does it make sense for you to consider formalizing your business by creating a legal entity? It depends. (My favorite lawyer answer).
There are costs associated with setting up an entity, including filing fees with the Secretary of State and legal fees for an operating agreement and advice. States also require annual fees for formal business entities (DBA’s, or Assumed Names, are a one-time fee paid to your county, but they don’t protect your personal assets from liability claims). Note that you will also need to transfer the title of the properties to your company with a Warranty or Quitclaim Deed. Finally, there is also paperwork to be maintained, which takes some time.
Incorporating (or setting up an LLC) brings benefits, too. In addition to the legal protection that separates your business from other assets in the event of suit, there are tax benefits, particularly if you set up an S-Corp and pay yourself with W-2 income. Sometimes property owners choose to incorporate so that individual members or shareholders can remain private from public documents. Finally, many property owners choose to put property in a corporation or LLC allow property to be distributed more easily upon death.
Is incorporating right for you? Consider your operational costs and liability risk. Corporations or limited liability companies aren’t right for everyone. It is important to understand what is required relative to corporate formalities and running a business to maintain a proper corporation or LLC. It takes time and work.