If you decide to start a business, you need to set up a legal entity for your new rental property company to protect your investment!
Whether you have numerous houses for rent in Washington DC or just one, you need to have a way to protect yourself and your assets from concerns that arise. Protecting your high-quality rental properties with more than just preventative maintenance is also an important decision concerning your long-term wealth!
Here are a few things to consider from the experts in DC property management services.
Note: This blog post does not act as a substitute for legal counsel. When in doubt, consult with your trusted attorney or Renters Warehouse DC/NOVA for real-time assistance!
Minimizing Risks Between Personal and Business Assets
One of the most important steps to take when you have DC rental properties is to separate your business and personal assets. This helps to protect your assets from claims made against your investment properties.
Here’s an example:
- Someone suffers an injury at your rental property.
- They file a claim against you.
- Your insurance is not enough to cover their losses.
- They go after your assets to fulfill your legal obligation.
If you have a legal separation between your houses for rent in Washington DC and assets, your business is held liable. However, your home and all of the assets you own with your family are sheltered.
What You Need to Do
There are several crucial steps in this process.
- It is always important for you to work with a real estate attorney in your area to ensure you have your entity set up correctly for your new company.
- To do this, you will likely open a small business bank account, set up a DUNS number to identify your business, and then set up ownership of your rental properties in your company’s name.
- Work to separate your credit usage from personal expenses and business spend, too.
Choosing the Right Legal Designation
- The next step in the process is to create a legal entity for your business in the DC area.
- You can do this by choosing to form a limited liability company (LLC) or other business entity.
- This designation (LLC) tends to be the most common entity chosen by DC property owners.
- It is unnecessary to create a corporate structure for your business in most cases, especially at first.
Once you have an LLC in place, your business assets (such as your houses for rent in Washington DC) are protected under that entity. However, it is worth keeping in mind that protections under an LLC are not complete. This is one reason why working with a full-service, DC property management team adds an additional layer of protection to your portfolio!
That said, your assets are no longer a part of your business. You may even elect to pay yourself a salary! You will also be able to purchase liability insurance and other coverage on your assets under your company’s name rather than your name.
Talk to a Tax Professional as Well
- While designating your business as an LLC is something your attorney can help you do, there are tax implications for these types of legal entities.
- Working with a commercial real estate attorney and a tax professional ensures you can make the right decisions to protect your new company.
Choosing the right business structure ensures you are not overpaying in taxes. You may benefit, for example, in forming an LLC over a partnership or a sole proprietorship. As your company continues to grow, you may then benefit from forming a C corp or an S corp.
How to Make Real Estate Entity Decisions
Before you decide which type of business entity is right for you, speak to your real estate attorney and tax professional about your options. You will also want to talk to them about local laws that may apply to your houses for rent in Washington, DC.
This decision may create differences in terms of legal structure and business licensing requirements. The size of your business portfolio can also make a difference in the right structure for you. This makes it advantageous to investors with an eye on growth to also run such decisions by their DC property manager—although it’s better to set up an entity before you ever add a property to your portfolio.
DC Property Management Is Here to Help!
One of the most common mistakes DC property owners make is believing they are in this process on their own. If you are ready to buy your first rental property or want to formally turn that second home you own into a business, you should also be working with a professional DC property management company—not just an attorney! Having Rent Estate™ Advisors by your side can help you make wise financial decisions.
- Your Rent Estate™ Advisors can answer questions about running your company.
- They can help you set up your business accounts and support finding both a real estate attorney and a tax professional with experience in DC rental properties.
- They can also work closely with you to help you explore optimal business structure changes as your business grows and changes.
While we highly recommend creating the right business entity, it’s only one part of an overall picture of growth as a DC residential property owner! If you’re seeking sustainable growth, then you’d benefit from the insight within our free Guide to Real Estate Investing: Grow Your Portfolio!