You’ve been investing in real estate for a while now and you’ve heard about the benefits of incorporating. But you’re not sure if it’s right for you.
Remaining a sole proprietor versus going the corporate route is an important decision and there isn’t always a clear ‘yes’ or ‘no’ answer. The option that is best for you depends on key factors like your unique needs, risks, and cash flow levels.
What are the Main Key Reasons to Incorporate?
- Legal differentiation between your business(es) and your personal activities and assets
- Strategic tax & estate planning
- Expanding operations, scaling, employees
- Strategic financing requirements
- Personal Privacy
When You Should Incorporate
There is a time when it absolutely makes sense to incorporate your real estate business – and if you check off some or all of these boxes, it may just be time for you.
1. Business(es) vs Personal Activities & Assets
One of the biggest reasons investors want to incorporate is clearly differentiate business and personal activities, and assets. Assets that are owed by the business, are not the assets of you personally, and vice versa. Buying assets with a corporation has the benefit of possibly reduced liability – with the caveat of personal gross negligence and personal guarantees (on loans or corporate agreements for example).
However, if you operate as a sole proprietor, your business assets and personal assets are considered to be under the same umbrella. That means that if something in your business fails, your personal assets (house, vehicle, cottage) could be at risk. Or if you get a divorce, or personal lawsuit, your business assets could be at risk.
To limit the extent and the reach of the liability if something goes wrong, is it a good idea to consider owning your real estate in a corporation. I’ve been told before, that the assets (now or in the future) should be at least $1M in value for it to be practical, to maintain a corporate entity.
It’s also a great way to keep the books clean, to have a corporate entity with a corporate bank account. If you own several pieces of real estate, it may make the accounting, legal liability, and transparency cleaner with corporate entities owning the various properties.
2. You Want Tax Benefits
Going corporate will have little to no effect on the amount of income tax you have to pay personally in Canada. Canada’s tax system is built in a way that the combined corporate and personal tax paid on business income that was earned through a Canadian Controlled Private Corporation (CCPC) would be about equal to tax paid on income earned by an individual.
However, your real estate investment collecting revenue, and pays expenses, interest and more. Owning your real estate in a corporation may provide you with great tax advantages, such as:
- Pulling cash out of the company as a repayment of loan, rather the income distribution
- Depreciation on paper, of an appreciating asset.
- Low tax rate with dividends payments (T5), than personal income (T4)
- Possible tax deferrals on ownership reorganisation.
- Flexibility when to declare, and therefore pay taxes on income.
- Invest your corporate savings with before-tax-money, rather than investing with after-tax-money from the savings from your personal income
- You may transfer corporate benefits (cash, equity), by transferring shares between one entity/person to another, without having to sell the property. It can provide greater ownership flexibility, especially in the context of estate planning as well.
- And many many many more tax strategies.
But, it’s important to talk with an real estate accounting professional about what’s right for you.
3. Scaling Your Operations
If you’re going to scale your real estate investment business, you may need employees, suppliers, and an office. Your corporation will be the entity, image and brand that the market will associate with. So your employees can protect that image, and work on behalf of the company, and not on your behalf personally.
4. Advantageous Financing Options
If you’re buying as a business, you may be able to qualify on the business operations, the business assets (as well as your personal assets and networth). Some banks also prefer to lend to a (success) business, to entice repeat business. There may also be opportunities to have limited and reduced personal guarantees on your loan if the corporation owning the real estate asset already has a substantial positive balance sheet, and income stream.
These factors are difficult to see and forecast at the beginning of your multi-family investment journey. Just remember that getting the right advisors to guide you along, can and will make a huge difference as the numbers get bigger.
5. Personal Privacy
If you were to own your multi-family building in your personal name, you may soon find agents, tenants, suppliers, managers, visitors finding your name, your phone number, your home address, and contacting you for all sorts of reasons. There’s a greater level of privacy when the property is owned in a corporation.
Important Things To Consider
Along with everything mentioned above, there are some less talked about things to consider as well.
Administration
A sole proprietorship is the easiest business to administrate. Corporations require administrative upkeep as well as costs involved with corporate compliance.
Potential Tax Implications
Know the provincial implications of incorporation because it can vary from province to province. Transferring your properties can go one of two ways. If your province has a land transfer tax, like Ontario, you’ll probably be stuck paying that if you transfer your properties to your corporation. That is why tax planning and structuring is better before you expand your real estate portfolio, into larger multi-family investment properties.
Is It Time For You To Incorporate?
The short answer is, it depends.
Consider all the factors above to determine if it’s right for you and your real estate investing business. But the best and only way to know for sure is to talk to a trusted business advisor and lawyer. They will analyze your business, weigh the pros and cons that are unique to you and help you make an informed decision.
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