HOLDING AND SUBSIDIARY COMPANIES IN REAL ESTATE
When most people think of real estate investment they look mainly at the acquisition and the sale of real estate and the profits and tax consequences that come from the exchanges of property. Unfortunately, this means that what occurs for the majority of an investor’s time in the real estate industry, simply holding the property, is not as scrutinized as it could be. This is unfortunate as the investor bares a lot of risk when holding onto real estate. Many investors look to the creation of holding companies to minimize liability during this static time period. Our boutique law firm concentrates in Real Estate Asset Protection.
What is a Holding Company?
A Holding Company is an incorporated structure that owns the titles and deeds to real estate on behalf of an investor. This minimizes the investor’s potential legal liabilities as well as being used as leverage when the investor is looking for financing for property acquisition. It is always a good idea to have a separate legal entity holding onto properties for your behalf as the real estate business is both inherently volatile and there are numerous issues effecting houses that the investor does not want to be personally liable for. (http://www.jwbrealestatecapital.com/real-estate-holding-company/). Using holding companies is critical to successful real estate asset protection.
So, there are significant benefits to having a holding company?
Yes. Forming a holding company is the best way to protect one’s personal assets if there are issues with the housing market or problems with the house itself such as structural problems, fire damage, or the property is found to be not up to a regulation for any number of reasons. The holding company serves to act as a shield of sorts for the investor’s personal liability. Holding companies are one of the strategies to maximize real estate asset protection.
A holding company is also useful for its potential leverage. Once there is a significant cash flow a holding company can control properties that far exceed the value of the company. For example, if a holding company has $500,000 it can contribute it towards a property worth 2 million dollars and open up the operating agreement so that other investors can buy the remaining 1.5 million dollars of ownership. Now the holding company is receiving a dividend from its 25% ownership of a 2 million dollar property and can place that property on its ledger as an asset to be bartered with during further real estate acquisition. In a sense the holding corporation now has ownership of a 2-million-dollar property and many of the benefits of that ownership but only $500,000 of risk. Real Estate Asset Protection minimizes liability risks and maximizes asset protection.
So, then what is a subsidiary company?
Another strong reason to have a holding company is the ability for it to act as an umbrella organization for subsidiary management companies. Using an umbrella policy is critical to successful real estate asset protection. A subsidiary company serves to hold the actual property and is the sole point of liability for that particular property or properties. That subsidiary company is then owned by the umbrella holding company that is associated but at the same time free from direct risk. That way if one of the properties managed by a subsidiary company goes underwater or has other issues that make it more burdensome than it is worth, it is possible for the holding company to put the management company into receivership, a type of corporate bankruptcy, while the overarching holding company continues on with business as usual, no longer being liable. This is a strong way to protect other properties or investments of any nature. In fact, this method is so valuable that many investors opt to create a management or subsidiary company for each and every investment they own to minimize risk. This is referred to as the “Silo” by investors, using the analogy that if one grain silo burns to the ground it is far away from the other silos and the fire is at no risk of spreading to other silos or any other potential assets.
The potential downside to holding companies and subsidiary companies are the potential tax treatments for different types of corporate structures. Most investors elect to structure their holding company as a Limited Liability Company (LLC), but they can also be structured as an “S-Corp” or a “C-Corp.” The attorneys at Gateville Law Firm are passionate about asset protection and putting our clients in both the safest and the most rewarding financial position they can be for their real estate investments. Our law firm concentrates in real estate asset protection.
The S-Corp, whether used for as an umbrella holding company or subsidiary company, is not subject to payroll taxes or employment taxes, this puts clients in a better position to generate revenue and keep acquiring new properties. The downsides of an S-Corp is that they are slightly more likely to be audited, due to lower taxes, and require more work to manage, but our attorneys work directly with our clients to make sure that these downsides are minimized or eliminated entirely and our clients enjoy both stronger financial health regarding their investment portfolios and peace of mind knowing that their holding company and or subsidiary companies are set up properly.
BACKGROUND OF GATEVILLE LAW FIRM
Gateville Law Firm can assist you with setting up holding and subsidiary companies in the State of Illinois. We utilize zoom and cutting-edge technology to offer virtual services for Illinois Companies. Sean Robertson may be reached at 630-780-1034. Sean Robertson is a licensed attorney and a graduate from DePaul University College of Law. Attorney Robertson concentrates in Real Estate Asset Protection and Wealth Preservation Law.