Basic Business Entities For Real Estate Investment

By Jason Watson, CPA
Posted Saturday, August 3, 2024

There are three basic small business entities with variations within. The three basic entities are-

• Limited Liability Company (LLC), the crowd favorite.

• Limited Liability Partnership (LLP) Limited Liability Limited Partnership (LLLP or triple “L” P as the cool kids say), or the legacy dinosaur General Partnership (GP).

• C Corporation (for profit), and the Personal Service Corp.

While not important for most real estate investors, there is an additional entity subtype with the “Professional” prefix. Some states require certain professionals, such as doctors, attorneys, accountants and engineers, to be a Professional LLC (the PLLC) or a Professional Corporation (the PC). Since you don’t see too many LLPs these days, you don’t see too many PLLPs either.

Two notables are missing from the list. First, sole proprietors are not an entity nor is the variant or close cousin of “Doing Business As” (DBA). If you wake up and want to sell used copiers, you can, right now, without any formalized structure. It is not smart, but certainly permissible. At times sole proprietors are interchanged with single-member limited liability companies (SMLLC) since the IRS and most states consider a SMLLC to be a disregarded entity for taxation. Both a sole proprietorship and a SMLLC will end up on Schedule C of your Form 1040. However, they are truly different in several underlying ways.

Also note how an S corporation is not listed. It is not an entity. It is a taxation election. The underlying entity must be one of the above, and usually it is an LLC (either single-member or multi-member) for the ease of formation including documentation.

Spoiler Alert: It is not advisable to use an S Corp election on an entity that owns appreciating assets such as rental properties. We’ll explain why later. We see S Corps used for brokerage sales / real estate commissions including management fees, and fix and flips primarily.

Let’s chat about each of these entities in turn. Here we go…