Plain and simple, holding companies own other companies. They can own assets or stock in other companies, but they can also own real estate. Most often a holding company does not offer any type of service or produce goods. Instead, they own stock and shares in other companies. This forms a corporate group. You most likely know of many famous holding companies, such as JPMorgan Chase & Co, Mitsubishi, and Bank of America.
If you own a business that owns real estate or plans to purchase properties that you will rent out, you need to consider how you will protect yourself. This includes asset and liability protection. In this case, you might consider a real estate holding company.
What is a Real Estate Holding Company?
Real estate is a business industry with a lot of ups and downs, but also risk and reward. Because of the risks involved in real estate many investors choose to use legal methods of liability protection. This can include using LLCs, but also through holding companies and subsidiaries.
Most often a real estate holding company is set up as an LLC (limited liability company). These are set up to hold real estate and manage the properties. Rather than having these assets in your name, you will have them in the name of your LLC or corporation. This provides a separation from the business, and the LLC can earn income from interest and rental payments.
Advantages of a Real Estate Holding Company
There are many benefits of putting your real estate properties into a holding company - financially and personally. Learn the key advantages of real estate holding companies and why so many people are starting them.
Owning a real estate holding company means that you can benefit from a variety of tax offerings. For example, there are specific tax deductions that you can claim, and you can avoid capital gains. Holding companies can also benefit from pass-through deductions if formed as an LLC, S-Corp, limited partnership, or sole proprietorship. All the profits will go through to the individual owners. These owners will need to file on their tax returns any profits and losses. The reason for forming as such is to avoid the double taxation of corporations.
There are a variety of flexible options when formed as an LLC holding company. For example, you can choose how you distribute the funds within the organization. This is called profit distribution which allows you to obtain more tax benefits as well.
Easy to Subsidize
Holding companies own subsidiaries. There are many ways for subsidiaries to move money to the parent company. This way the subsidiary is considered as a disregarded entity for tax purposes.
Keeping investments in a holding company provides limited liability protection. Essentially, this is the most important benefit of a holding company. Keeping your personal assets safe means that even if your company is sued, your assets cannot be claimed by creditors.
Disadvantages of a Real Estate Company
There are many advantages of a real estate holding company, but there are also disadvantages. Starting a Real Estate Holding Company means you will need to pay start-up costs and annual costs to stay in compliance. These disadvantages not only include the costs of a Real Estate Holding Company, but also the possibility of higher taxation.
Holding companies will suffer from capital gains tax if they do not own 80 percent of the subsidiary company stock. This can be a huge loss, so it is essential to comply with this. Tax will need to be paid on the sale of stocks, bonds, real estate, and anything else held by the company.
How to Start a Real Estate Holding Company
Starting a real estate holding company is a lot easier than it seems. Create a real estate holding company stress free by following these steps!
Obtain an EIN Number
This is the social security number for your business. You can apply online with the IRS.
Find Registered Agent
Your registered agent is a person or a . third party company that has an address in the state that your business was formed. They need to be available to receive due process in case you are sued. They can be a member of your organization, a company that you pay for their services, or any person over 18 years of age who is available during business hours.
File Articles of Incorporation
Whether you form an LLC or a corporation, you will need to file some type of articles of incorporation (or articles of organization). These are usually filed at the Secretary of State’s Office.
Draft Operating Agreement
An LLC can have one member or many members. They should all be listed on the LLC operating agreement. This will define the roles of each member, and manager roles if they are present. It should also explain ownership and operations rules, as well as member’s ownership interests, voting rights, and duties.
Open Business Bank Account
Starting a holding company means you need to have a new business account. You want all the funds for the business and for operations to go through that account so you can stay as organized as possible.
Find and Purchase a Property
To officially start a real estate holding company you will need to own real estate. This will be done in the name of your LLC or holding company.
Cost of a Real Estate Holding Company
Starting a real estate holding company will not come without costs and fees. These fees will always vary by state. On average, the filing fee for an LLC is $127. Despite this, it ranges anywhere from $10 to $800. Typically when working with a lawyer you should expect to spend about $1000 to set up your holding company. Other LLC fees include the LLC annual fee, which ranges from $0 to $800. These costs may dictate which state you decide to form in.
Should You Start a Real Estate Holding Company?
Forming a holding company can be complex and have added compliance costs. Generally speaking, a real estate holding company is a good option for those who are looking to own and manage real estate as a business opportunity. If you are looking to buy one property you may not need to form a holding company. Instead, you might simply form an LLC.
Despite this, having a holding company will keep your assets protected and give you the opportunity to expand your business. Contact us today to learn more about forming your holding company.