Planning for a successful real estate business

Disclaimer The information in this presentation is intended only for general informational purposes. No attorney-client relationship is intended by presenting this information. You should consult with your attorney and accountant regarding your own circumstances.

Real Estate is a business 1. There are assets 2. There are contracts 3. There are government regulations 4. There are separate tax rules 5. There are big dollars at work

Build a Better Business 1. Select the correct business form 2. Operate the business correctly 3. Create a good succession plan 4. Utilize best practices 5. Make all planning work together

1. Selecting The Correct Business Form – Issues to Consider Limited liability Tax minimization Ease of use Type of activity

Business entity options Legal Entities 1. Corporation 2. LLC 3. Some Partnerships Non-entities 1. Sole Proprietorship 2. Trust 3. Some Partnerships

Selecting The Correct Business Form - Corporations Limited liability Many terms set by law Requires documents and filing Tax options Can be publicly traded A legal person

Selecting The Correct Business Form - LLCs Very flexible A legal “person” Requires documents and filing Limited liability Tax options

Selecting The Correct Business Form - Partnerships Numerous variations Essentially a contract Some have limited liability No tax options Varying requirements to form Very flexible

Selecting The Correct Business Form – Sole Proprietor Selecting The Correct Business Form – Sole Proprietor Can be done with an assumed name No need to file anything No liability protection No tax options

Selecting The Correct Business Form - Trust Not a business entity – typically used for estate planning or other purposes Typically no limited liability Loss of control Complicated Usually no tax options

Selecting The Correct Business Form- The Bottom line LLCs are far and away the most popular 1. The most flexible tax options 2. Flexible ownership options 3. Flexible governance rights 4. Limited liability 5. Additional legal protections

Selecting The Correct Business Form – What About Joint Ventures? Not a legal entity Defined as “a commercial enterprise undertaken by several persons jointly.” Limited as to scope and duration but usually not as to liability In other words, it is a contractual relationship that effectively creates a general partnership Could be done with a business entity Relationship should always be carefully defined and spelled out in writing

2. Operating The Business - Maintenance LLCs, Corporations, and most Partnerships require regular maintenance Trust have varying rules on maintenance Sole Proprietorships do not require maintenance

Operating The Business - Finances LLCs, Corporations, and Partnerships should have separate finances Sole Proprietorships can co-mingle funds Trusts impose fiduciary duties and co-mingling can be a problem

Operating the Business - Divided You Stand, United You Fall If you own everything in one company or in your own name, one lawsuit can result in the loss of everything you own If you own things in separate companies, then only the entity involved in the suit is at risk

3. Every Business Needs A Succession Plan - Concepts Business Succession Plan = Method to transfer the business from one owner to another – Commonly include a buy-sell agreement

Every Business Needs A Succession Plan - Why Even new businesses need a succession plan – Do you want to be in business with your partner's spouse or children? – What is your exit strategy? – Protect yourself, your business, and your family from death or disability

4. Utilize Good Sales and Purchasing Practices – Know The Facts Know your customers and suppliers – Learn the correct legal name – Know all owners – Understand their finances and practices

Utilize Good Sales and Purchasing Practices – Use Good Contracts Use carefully written contracts Draft your own contracts when possible Have a lawyer review your contracts – before you sign Follow the contract

Utilize Good Sales and Purchasing Practices – Follow the law Make sure you comply with local zoning and leasing rules Insist your contractors, managers, and suppliers do likewise Require your tenants to follow the law and timely pay

5. All Planning Must Work Together Business planning must compliment personal planning Make your business plan fit with your retirement plan, your financial plan, and your estate plan Ensure your advisors work as a team

Common Mistakes Investors Make Select the wrong entity or no entity Organize in other states Sloppy bookkeeping and contracting Fail to comply with state and local law Do not follow good business practices

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