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As a novice investor, you might operate under the assumption that grouping your real estate portfolio under the umbrella of a rental property corporation is something you can or should put off until you have millions of dollars in your account. Incorporating may seem like some far-flung goal, but those investors who don’t plan for a bright future may find themselves in the lurch when that future arrives.
If you’re investing in real estate, it’s never a bad idea to consider the benefits of incorporation. We’ve got the low-down on the pros and cons of incorporation, plus how to set one up if you decide it’s right for you.
But first, if you would like to learn more about how financing a property in a rental property corporation is different than buying it as an individual, click the link below to book a free strategy call today.
What is a rental property corporation?
To the average person, the term “corporation” may sound fancy to the point of inscrutability. In truth, a corporation is a relatively straightforward legal operation. Put simply, a corporation is a collected group of people or an organization that is set up to operate as a single business entity. A corporation can be set up for any number of purposes, including real estate investment.
If you don’t know a lot about the intricacies of setting up a corporation, here are some of the reasons that real estate investors choose to incorporate every day.
The principal reason that most investors choose to incorporate is the advantage of limited liability. When you own a business as the sole proprietor, then your name is attached to your business assets as well as your personal assets. As a result, if your business fails and you end up losing your assets, those losses can extend to your personal belongings.
In other words, while it’s a worst-case scenario, if your sole proprietorship fails, then you could be on the hook for the losses. That means debt collectors can end up taking your home, vehicle and any other valuables that belong to you. Incorporating protects your personal belongings and restricts the amount you can lose to the amount of money you have invested in your business.
Raise income easier
When you incorporate in Canada, you’ll suddenly find that you have several more legal avenues available for raising money. Because of the way rental property corporations are constructed, there are several ways to get money from investors or shareholders.
Corporations have access to bonds, which are essentially promissory notes wherein the company promises to repay a given amount on a given date. Often, bonds apply an interest rate to the amount the buyer initially pays. Best of all, the interest rate paid out is usually tax-deductible for the companies.
When you incorporate your company, you will find that borrowing money from private lenders and lending institutions is much easier than borrowing as the sole proprietor of your business.
Unlike a business you own on your own, a rental property corporation can issue individual stocks to shareholders. Using either preferred stock or common stock, you can sell parts of your rental property corporation to shareholders to raise capital quickly.
Some rental property corporations — called “growth companies” — don’t offer routine interest payments to shareholders. Instead, they pay smaller dividends to shareholders and redirect their profits to growing their business.
Those are just the basics of how a rental property corporation can raise capital in ways that a sole proprietorship cannot.
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Provincial vs. federal incorporation
There are two means of incorporating your business: provincial incorporation and federal incorporation. In general, provincial incorporation tends to be more relaxed than Canada-wide incorporation.
When you register a company at a provincial level, the scope of your business is often limited to the specific province where you’re incorporated. Your headquarters must also be located there. When you’re operating a real estate investment company that is located in one specific province, and you have no plans of expanding beyond your current borders. Provincial incorporation can be just the ticket.
Federal incorporation, meanwhile, allows your company to operate on a national basis. That means you’re not restricted to your choice of customer or property location. The drawback to federal incorporation is that you will also need to register your company as an extra-provincial corporation. In other words, when you register your rental property corporation at a national level, you will also need to file additional paperwork to conduct business in whichever province you choose to work. For that reason, federal incorporation tends to run cheaper than provincial incorporation.
When you’re just starting out incorporating your real estate investment company, provincial incorporation will likely work best for you. You can always transition to another province or federal status at a later date should you decide to expand.
How to incorporate
Fortunately, the process of incorporating your real estate investment company is relatively straightforward (albeit with a mountain of paperwork involved). Once you’ve made a choice between provincial or federal incorporation, you’ll take one of two routes.
For federal incorporation, you’ll apply for your articles of incorporation, federal business number and income tax program account with the national government. Then you’ll have to file extra-provincial tax papers for every province where you intend to work. For provincial incorporation, you’ll have to track down the specific regulations of the province where you plan to operate to get your business number and income tax program account.
It’s smart to talk to a legal professional
Choosing to transform the contents of your real estate portfolio into a rental property corporation isn’t the right choice for every investor. Beyond the basics, there are several unique rules and regulations that govern rental property corporations from province to province. If you’re seriously considering incorporation, it would be worthwhile to enlist a real estate lawyer for at least a one-off consultation.
A legal professional will be able to draw out the details that apply to your real estate company and ensure that you’re making the right steps forward for your interests.
In short, incorporating your real estate company before you hit it big will go a long way toward protecting your assets.
Once again, if you would like to learn more about how financing a property in a rental property corporation is different than buying it as an individual, click the link below to book a free strategy call today.