The business entity you choose for your property management company will affect you in very real ways—especially when it comes to taxation and financial and legal liability.
This is a big decision and one that you may want to make with the assistance of your accountant or attorney. Following are the four business entities most commonly used by property management companies and some basic information about each.
Sole Proprietor
The title of this business designation pretty much says it all—a sole proprietorship is a business owned by one individual. Unlike more complex options, sole proprietorships do not have to be legally registered with the state you do business in. Rather, a sole proprietorship’s existence is solely based on the fact that you’ve gone into business. In other words, it’s simple and free to set up.
Sounds too easy, right? Well, there is a drawback. Because you are one and the same with your business, business gains and losses are filed on your personal tax forms and, most notably, you are liable for the business, both financially and legally.
Partnership
A partnership is much like a sole proprietorship, but it involves two or more owners. As with a sole proprietorship, no paperwork or registration is required—you are simply in business. Again, partners claim their share of business income on personal tax forms and are held liable for the business’ financial and legal claims.
Limited Liability Company (LLC)
LLCs are a bit more complex to set up than sole proprietorships or partnerships, with paperwork and costs due upon establishment. One of the great benefits of a LLC is that (as the name indicates) owners’ legal and financial liability is limited. Note, however, that in terms of taxes, LLCs function more like sole proprietorships and partnerships—each owner pays taxes for his share of the business on personal tax forms.
Corporation
Corporations are completely separate from individual owners for taxation purposes—in other words, personal and business taxes are filed separately. Personal income gleaned from the business (salary, bonuses, etc.) are filed on personal taxes, but corporate income remains solely on the business’ tax forms. Likewise, owners are not liable for business finance and legal issues.
When setting up your business, think carefully about how various business designations will affect both your taxes and liability. Protecting both should be your primary consideration.
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