Real estate investments can provide a road to financial prosperity and stability. However, the property’s ownership structure may impact your control, taxation, and financial stability. Whether you wish to buy commercial or residential real estate, make sure you know which structure is the right one for you.
The most straightforward property ownership structure is sole ownership. In this scenario, one person or entity completely controls the property. While this is a simple structure, sole ownership can have some pros and cons.
As the lone owner, you will have complete control over all decisions. There is no need to consult with partners about the property. Along with that, when there is an increase in the property’s value, you will reap the benefits. You never have to share that portion of the increase with others.
However, there are a few drawbacks. The main one is personal liability. If property-related debts, accidents on the premises, or legal obligations exist, you and your personal assets could be at risk.
Additionally, this ownership structure does not allow you to pool capital or resources with others. Securing financing on your own can be difficult for many large-scale commercial investments.
Often, sole ownership is better for those looking for small residential properties or wanting full control of their real estate assets.
In a partnership, the property will be owned by two or more persons or organizations. There are some advantages to this kind of structure. You can split the cost of buying and managing a property by forming a partnership. This collaboration allows you to access a wider range of resources, including capital, knowledge, expertise, and skills.
Keep in mind that partnerships can benefit from pass-through taxation. With that, all the profits and losses are passed on to individual partners. As a result, you can avoid double taxation.
There are a few cons to this structure. First, decision-making can become complex and contentious when multiple stakeholders are involved in the process.
In this ownership structure, all the partners will share liabilities. However, that comes at a cost. For example, if one person incurs debts or has legal issues, all partners could be held responsible.
Partnerships are popular with real estate investors who want to diversify their portfolios, benefit from combined assets, or have access to additional capital.
Limited Liability Companies (LLCs)
LLCs combine sole ownership and partnerships. This structure offers personal liability protection and certain tax advantages.
The biggest advantage is that personal assets are shielded from the LLC’s debts and legal obligations. This structure can be managed by members or designated managers. Sometimes, ownership can be divided unevenly among members.
These ownership arrangements benefit from pass-through taxation as well. That can make filing taxes simpler and prevent double taxation. The members submit gains and losses on their individual tax returns during tax season.
There are a few drawbacks, much like the other structures. First, LLCs must file annual reports and maintain records, which might result in more administrative work. There are upfront expenditures and continuing fees associated with creating and maintaining an LLC.
LLCs are a popular choice for real estate investors who value personal liability protection while retaining flexibility in management and ownership. This structure offers a middle ground between sole ownership and partnerships, allowing for shared ownership without the same level of personal risk.
Find the Right Property Ownership Structure for Your Real Estate Purchase
Whether you opt for sole ownership, partnerships, or LLCs, each property ownership structure comes with its advantages and disadvantages. If you want to learn which one works for you, consult with the team at Bielski Chapman, LTD. We can help you choose the right option for your needs. To schedule a free 15-minute consultation, please contact our office at (312) 583-9430.