As a business owner, you put yourself in a position of risk. Whether that is your business failing, risk of theft, or general risk that someone may become injured while on your property. Most business owners have a general insurance plan to mitigate these risks and cover these claims, but if you own your property, or work in the field of owning rental properties, there is another method of mitigating risks: forming a real estate holding company.
Holding companies own assets or stock of other companies. Although the company does not usually produce goods or offer services itself, owning assets or shares is its purpose. These assets of other companies allow a holding company to form a corporate group.
Because real estate is a business with a lot of risks, investors typically want to separate their assets and liabilities. This is done through the formation of holding companies and subsidiaries. Real estate holding companies allow you to maintain liability protection for each individual business or investment.
In some cases, a holding company may file a consolidated tax return. In this case the losses incurred in a subsidiary can be offset against the profits of the other subsidiaries. The net ends up resulting in a lower tax bill overall. Typically subsidiaries pay dividends to the holding company, but without creating a tax liability.
When forming a holding company and a subsidiary, they might be in the same line of business. This helps to avoid competition by having them owned by the same corporation.
Primarily, a real estate holding company helps to protect your personal assets, as well as your primary business assets. If someone were to get hurt in one of your businesses, that person can sue the owner. By having a holding company as the owner, you avoid personal liability, and the business is protected from the lawsuit.
Holding companies are very easy to create and grow. This allows you to overall grow your business more easily than you would with only one business model.
Often having a holding company means one of your companies is larger or more stable than the other. This allows the larger company to obtain financing for the subsidiary, which may not have been possible otherwise.
In general, there are two main disadvantages of a real estate holding company:
These costs of a real estate holding company can become expensive, and if you are not utilizing the company properly they may cut into your bottom line.
Although there are a few ways to structure a real estate holding company, an LLC is the most popular option. This is because it offers you liability protection and personal separation, while also allowing you flexibility and freedom. When setting up an LLC you will be required to have the following:
It is important to keep your business and personal financials separate. When forming a holding company, you also want to keep each business account separate as well.
Although it may seem easy, depending on the structure of your business, it can get very complicated. Hiring a professional can ensure you will not make mistakes when it comes to setup.
The main goal of establishing a real estate holding company is to protect your assets and properties. This means you will need to go and purchase investment properties. Find one that fits your goals and budget.
Financing may include your own cash funds, a loan, pulling a loan from your parent company, or getting general financing from a lending institution.
At this point, you will be closing on the property which means you pay closing costs. Finally, you will have your real estate holding company set up, and can continue to purchase properties to add to its portfolio.
In general, the costs of starting a real estate holding company vary by state. The average state filing fee to set up an LLC is $127 if you are doing it yourself, while the average cost to set it up with an attorney is $1,000 or more. The typical costs required to set up an LLC include:
If you plan on investing in real estate and you already own one company, it may be a great idea to start a real estate holding company. This can allow you to conduct and manage your real estate investments while reducing your personal exposure to risk and liability. Contact us today to get started and learn how you can reduce your liability and start your own real estate holding company.