11 of the Biggest Mistakes Real Estate Investors Make When Selecting and Forming an Ownership Entity
11 OF THE BIGGEST MISTAKES REAL ESTATE INVESTORS MAKE WHEN SELECTING AND FORMING AN OWNERSHIP ENTITY
1. Not considering the fact that you may not need an entity at all
1.1. For example, with smaller properties, the formation and operating costs may outweigh any benefits:1.1.1. estimate your maximum potential liability (other than your property debt)
1.1.2. determine how much you can protect through insurance
1.1.3. evaluate the remaining potential liability to determine if the benefits outweigh the costs of forming and operating an entity
2. Not identifying all potential conflicts of interest with your co-owners before deciding to hire a single attorney to represent everybody, for example:
2.1. different tax objectives
2.2. different abilities to contribute capital
2.3. different target lengths of holding period
2.4. different exit strategies
3. Not getting your tax advisor involved in the entity selection decision.
4. Not integrating your estate planning attorney in the entity selection and formation decision.
5. Not coordinating with your lender to make sure you know their requirements.
6. Not putting your agreement in writing.
7. Thinking that an entity shields you from all liabilities.
8. Not including a buy-sell agreement in your agreement to provide important benefits:
8.1. Prevent outsiders or heirs with conflicting interest from obtaining ownership
8.2. Ensure the continued legal existence of the entity on death, withdrawal, bankruptcy or expulsion of co-owner
8.3. Ensure continuity of management and control by remaining owners
8.4. Avoid later disputes over the value of a co-owner's interest in the future
8.5. Prevent the continued involvement of co-owners who no longer contribute value
9. Not considering what happens if and when additional capital is required.
9.1. Termination?
9.2. Dilution of interests?
9.3. Loan by other co-owners?
10. If you are going to form an entity, in most cases, your biggest mistake could be not selecting a limited liability company
11. Paying $800 franchise tax when you file your Articles of Organization (LLC's only).
