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Use of Holding and Subsidiary Companies for Real Estate Investors

Posted on in Real Estate Law

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Experienced Real Estate and Asset Protection Attorneys in Naperville, Oswego, Plainfield, Bolingbrook, and Romeoville

When most people think of real estate investment they look mainly at the acquisition and the sale of real estate and the profits and tax consequences that come from the exchanges of property. Unfortunately, this means that what occurs for much of an investor’s time in the real estate industry, simply holding the property, is not as scrutinized as it could be. This is unfortunate as the investor bares a lot of risk when holding onto real estate. Many investors look to the creation of holding companies to minimize liability during this static period.

What is a Holding Company?

A holding company or otherwise known as a “parent company” is an organization that owns other LLCs or Corporations under its’ umbrella.  For example, holding companies and parent companies are often used when a real estate investor owns multiple real estate properties.  Let us assume that John Smith is a real estate investor and he owns three apartment buildings.  His holding company is an organization that will own his three (3) separate apartment buildings.  For instance, the holding company is named J.S. Real Estate Investments, LLC.  Thus, the purpose of a holding company is to limit a real estate investor’s liability concerns and issues.  J.S. Real Estate Investments, LLC also owns J.S. 123 Lasalle Drive, LLC; J.S. 145 Kentshire Drive, LLC; and 1001 Essington LLC.  Essentially, the names of the LLCs are the property addresses. 

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Essentially, a holding company is used to own other real estate investment properties and protect one’s real estate investments from creditor or lawsuit issues.  For example, let us assume that there is a liability issue at 145 Kentshire Drive, LLC, the purpose of a subsidiary and holding company relationship is to limit the liability concerns of one property from affecting the ownership interests of another property.  Another prime example during the recession was a foreclosure on one property could affect the economic viability of the owner property interests.  For instance, a foreclosure for slow pay or non-payment of a property or otherwise known as a strategic default could affect all the real estate interests of a real estate investor if all the properties are in the personal name of a real estate investor.  One foreclosure lawsuit and liability issue could affect all the real estate properties because a lawsuit judgment will personally attach to all properties that a person owns in their personal name.

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So, there are significant benefits to having a holding company? 

Yes. Forming a holding company is the best way to protect one’s personal assets if there are issues with the housing market or problems with the house itself such as structural problems, fire damage, or the property is found to be not up to a regulation for any number of reasons. The holding company serves to act as a shield of sorts for the investor’s personal liability.

So, then what is a subsidiary company?

Another strong reason to have a holding company is the ability for it to act as an umbrella organization for subsidiary management companies. A subsidiary company serves to hold the actual property and is the sole point of liability for that property or properties. That subsidiary company is then owned by the umbrella holding company that is associated but at the same time free from direct risk. That way if one of the properties managed by a subsidiary company goes underwater or has other issues that make it more burdensome than it is worth, it is possible for the holding company to put the management company into receivership, a type of corporate bankruptcy, while the overarching holding company continues with business as usual, no longer being liable. This is a strong way to protect other properties or investments of any nature. In fact, this method is so valuable that many investors opt to create a management or subsidiary company for each investment they own to minimize risk. This is referred to as the “Silo” by investors, using the analogy that if one grain silo burns to the ground it is far away from the other silos and the fire is at no risk of spreading to other silos or any other potential assets. 

Tax Treatment of Real Estate Companies in Naperville, Bolingbrook, Oswego, and Plainfield, Illinois

The potential downside to holding companies and subsidiary companies are the potential tax treatments for different types of corporate structures. Most investors elect to structure their holding company as a Limited Liability Company (LLC), but they can also be structured as an “S-Corp” or a “C-Corp.” The attorneys at Robertson Legal Group are passionate about asset protection and putting our clients in both the safest and the most rewarding financial position they can be for their real estate investments and for that reason we strongly recommend the S-Corp election for most of our clients. The S-Corp, whether used for as an umbrella holding company or subsidiary company, is not subject to payroll taxes or employment taxes, this puts our clients in a better position to generate revenue and keep acquiring new properties. The downsides of an S-Corp are that they are slightly more likely to be audited, due to lower taxes, and require more work to manage, but our attorneys work directly with our clients to make sure that these downsides are minimized or eliminated entirely, and our clients enjoy both stronger financial health regarding their investment portfolios and peace of mind knowing that their holding company and or subsidiary companies are set up properly.

Experienced Commercial Real Estate Attorneys in Plainfield, Bolingbrook, Romeoville, Naperville, and Kendall County

In conclusion, Sean Robertson and Robertson Legal Group, LLC are passionate about asset protection and real estate law.  Sean Robertson has extensive litigation and post-judgment liability planning experience where he has personally protected the real estate investment and real estate properties from significant judgments, and liability concerns.  Sean Robertson has an office in South Naperville, Illinois, which is near DuPage County, Will County, Kendall County, Naperville, Plainfield, Romeoville, and Bolingbrook, Illinois.  Sean Robertson resides in Yorkville, Illinois and helps real estate investors in the Chicago Suburbs.  Sean Robertson may be reached at 630-780-1034 or via our online contact form.

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