Incorporating Your Business
Many small business owners wonder whether it is a good practice to incorporate, especially when your investment property business starts to experience success and grow. Like most things, there are advantages and disadvantages to incorporation. Of course, incorporation isn’t for every business, but whether you’re an experienced property manager who has many rental properties or you’re just starting out with your first investment property, you may want to consider it. Here are several things you should know before making this decision.
What is Incorporation?
Incorporation is the starting a company, or other organization as a legal entity. The first step in the process of incorporation is when you file for incorporation with your state’s Secretary of State. It can be done online or by mail and requires you to have a business name, and a statutory agent. Some may retain an attorney to do the paperwork, but the State’s website is designed to make it easy for anyone to do their own Articles of Incorporation. There is a fee which varies from state to state to file, and different states offer different incentives. Check with your state to find out more.
When you incorporate, you effectively transfer the ownership of your business from you personally to an independent entity making you no longer personally liable.
As a sole proprietor (an unincorporated business owner), there is no distinction between your personal income and your business income. As a real estate investor it doesn’t matter how many properties you own—one or one hundred and one—you may run into legal troubles. You don’t want to get into a situation where your personal assets could become liable to cover for the losses on your property. This is where the corporation comes into play.
Advantages of Incorporating:
In addition to protection against liability, you will also get tax perks once your properties are incorporated. When you collect rental income as a sole proprietor, it puts you in a bigger tax bracket, but when your properties are owned by a corporation, your personal income is separate from your rental income, less income to you personally puts you in a smaller tax bracket.