Example uses of a Real Estate Holding Company

Real estate holding companies are the best way to protect your personal assets from the liabilities associated with buying and selling real estate. A holding company is the legal entity that holds assets, collects profits, and assumes liability for you.

While you absolutely should create a holding company any time you plan to invest in real estate as a form of business, there are different kinds of companies that you can establish to best serve your needs and protect you from loss. It all depends on your unique situation and what you plan to do with the real estate you purchase.

Parent-Child Holding Company

Depending on your business needs, you might find it beneficial to set up multiple companies to purchase and manage your investments. A parent company is the primary company that owns one or more smaller companies or businesses. The parent company assumes control of smaller companies by either buying them outright or owning a majority of the smaller companies’ stock.

The companies that are owned or otherwise controlled by the parent company are known as child companies or subsidiary companies. Child companies are usually somewhat related to the parent company as far as a specific industry is concerned, but it’s not uncommon for the relationship between parent and child companies to go undisclosed. That’s because child companies are separate legal entities from the parent company.

Child companies operate as their own business, and are related to the parent company only insofar as they are legally owned by the parent company. However, parent companies do receive tax benefits and enhanced legal protections from investments in child companies.

Sister-Sister Companies

When a parent company owns multiple child companies or subsidiaries, those subsidiaries are referred to as sister companies. Just like child companies can act independently from their parent company, sister companies are often unrelated. In fact, sister companies can even act as competitors on occasion.

There are cases, however, when sister companies will act together. If they operate in the same market or industry, sister companies can negotiate deals on product pricing, share marketing budgets, or even share vendors and supply chains.

Scenario 1: Individual LLCs Own and Manage the Property

When it comes to real estate, your holding company needs to pull double duty. Not only do you need a legal entity under which to buy, sell, and manage property, but you also need to protect yourself from liabilities. The simplest way to organize your holding company is to create an LLC that does it all.

That means your LLC is a single holding company that conducts all the business associated with your real estate investments and endeavors. Your holding company is the entity that applies for financing, owns the property, manages the property, performs repairs, sells the property, and assumes all risks associated with that process.

Having an individual LLC that owns and manages the property creates an adequate barrier between your own personal finances and those associated with your real estate investments. You’re only responsible for reporting income for one company, and any legal ramifications only affect the holding company itself.

Scenario 2: Individual LLCs Own Property That’s Managed by a Property Management Company

While it’s perfectly acceptable to have a single LLC own and manage a property, there’s another way to create even more risk protection in real estate investment. That’s where parent-child holding companies and sister-sister companies come into play.

A parent holding company would purchase and sell real estate. The holding company would be responsible for applying for financing, owning the property itself, and selling the property. The child company would assume all management responsibilities for tenants, repairs, and maintenance. This arrangement creates another layer of asset protection between the child company and the individual behind the LLC.

For even more protection, an LLC in the form of a real estate holding company would create two child companies or subsidiaries. These subsidiaries would act as sister companies, supporting the interests of the parent company. In this example, one sister company would be responsible for purchasing and selling real estate, while the other sister company would maintain and manage the property.

The Bottom Line

When embarking on your real estate endeavors, it’s important to structure your business ventures in a way that protects your assets while meeting your goals and abilities. You don’t want to create multiple subsidiaries and sister companies if you don’t have the business experience or available funds to support multiple businesses. Overcomplicating your holding company’s responsibilities won’t make your investments any more solid. Instead, allow your holding company to work with you, fulfilling your needs and protecting your assets as you grow your business.

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