Owning a business is very rewarding. However, you could lose everything if you run into legal troubles. For example, creditors could come after your Airbnb properties to cover an old debt. Luckily, you protect your assets by organizing them into a separate legal entity. This type of organization is often referred to as a holding company, and its primary purpose is shielding the assets from the legal liability of their owner. Once your business becomes a significant portion of your income, you should consider setting up a holding company. These entities will help protect your business in the event that you run into legal troubles.
What is a Holding Company?
A holding company is a business entity whose primary purpose is owning and holding assets. Holding companies don’t operate as a traditional company. They have no business operations and they typically don’t generate revenues. Instead, owners use them as a legal entity for holding assets separately from ownership’s personal holdings.
Can Holding Companies own Real Estate?
Holding companies are commonly used to protect assets like real estate. They’re popular among real estate investors because they protect properties from personal liabilities incurred on account of the owner. Depending on how they’re set up, they can also generate some favorable tax benefits.
How to Create an LLC to Hold Your Airbnb Assets
You can set up a holding company in a variety of ways. However, limited liability companies, or LLC, are very popular. Many business owners prefer LLCs for their simplicity and affordability. You can use almost any business entity as a holding company, but we’re going to use an LLC as an example in this article.
If you want to start up an LLC as a holding company, you need to choose a business name. Remember, your name needs to comply with local regulations. See your state laws for more details. Once you have a name, you must file your company’s Articles of Organization with the state. The articles of organization include important information about your business, including its name, address, and contact details for your registered agent.
Once you submit the articles, you need to draft an operating agreement. This document outlines your LLC’s ownership structure and details everyone’s roles within the organization. Once you form your LLC, you should also request an Employer Identification Number from the IRS for tax purposes. Some companies will offer to attain an EIN for you in exchange for a fee. However, these services aren’t usually worth the cost. Applying for an EIN only takes about five minutes and you can complete the entire process online, so it’s easy to get one yourself. Click here for the IRS’s EIN application page.
You can file all these documents yourself, but you can also hire a company to simplify the process. There are countless companies that provide these types of services, so it’s not hard to find help if you want it. Typically, the firm charges a small fee for handling the paperwork. If you hire a third-party, you’ll have to cover this fee in addition to any state filing costs.
What are the Benefits of Holding Companies?
The main benefit of setting up a holding company is legal separation from your assets. This separation can help contain any legal consequences that may affect your business. For example, your creditors can’t go after your holding company assets if you file for bankruptcy. You can reap some tax benefits depending on how your structure the holding company. With proper planning, a holding company can provide major benefits for real estate investors.
Holding companies can help protect your personal assets too. If someone sues your holding company, their lawyers can’t go after your personal assets because the holding company is a separate legal entity. Using holding companies effectively can help you protect yourself and your business from potential legal ramifications.
What are the Disadvantages of Holding Companies?
Holding companies offer some noteworthy advantages, however, they can make taxes a lot more complicated. This is especially true for companies with multiple owners. You should keep every company’s accounting books separate to make the process as simple as possible. Each company should have its own bank accounts and financial records to ensure everything is organized properly.
More Airbnb Tax Questions?
If you’re considering setting up a holding company, congratulations! Structuring your business to protect against loss is an important step for growing businesses. We’re not attorneys so, unfortunately, we can’t tell you whether a holding company is right for you. However, we can explain how the decision will affect your tax situation. Schedule a one-on-one strategy session with one of our experienced tax experts to learn more. You can also sign up for our complimentary tax tips newsletter using the form below.