Building an Entity Management System
BUILDING AN ENTITY MANAGEMENT SYSTEM
Related to your real estate are the legal entities formed to hold your real estate. Much like your real estate, legal entities require design, management and systems for successful operation.
In this article we will discuss:
Architecture and Design – the structure of the entity
Foundation - the formation of the entity
Construction - the management processes of the entity
Operating Systems - the software for managing the entity
ARCHITECTURE AND DESIGN
DETERMINING YOUR COMPANY STRUCTURE
Before you build a building, you decide what you will build. Apartments? An Office Building? Retail? Likewise, before forming the legal entity you should start by deciding your business objectives. Where will the entity be located, in which state? Does the entity need to qualify to do business in another state? Are you forming a new entity to hold the property or adding this project into an existing entity? Will there be multiple partners owning the property? What is the desired taxation structure for the entity? Will you finance the property? Will the lender require a bankruptcy remote, or special purpose entity?
The answer to these business objective questions will determine the type of legal entity you form to hold your real estate. There are many different legal entity structures. The most common ownership structures for commercial real estate include:
Individual Ownership - Acquiring commercial real estate as an individual is generally not ideal as it exposes the owner to unlimited liability. Often real estate acquired by an individual will subsequently be transferred to another form of ownership.
Partnerships – The two types of partnerships, general and limited, hold title to real estate and the partners have either equal or unequal interest in the real estate. There are certain legal liability protections offered in a limited partnership that make this form of legal entity ownership favorable for some investors. There are also restrictions related to a limited partners’ ability to operate or make decisions related to the real estate.
Co-Ownership Structures - including joint tenancy, tenancy-in-common and co-tenancy, co-ownership is an arrangement with two or more parties owning real estate. Each co-owner has a separate interest in the property and is therefore unrestricted in dealings with their interest in the property.
Limited Liability Companies (LLC’s) – Limited liability companies are popular for at least two compelling reasons: first, the liability of the member(s) of an LLC is limited to the assets held by that company. Second, unlike a corporation, earnings generated by the LLC are not taxed at the corporate level and then taxed again at the individual shareholder level; income from the LLC is passed through to the members and only taxed at the individual level.
Corporations – Risks for a corporation that holds real estate is limited to its assets without liability to the shareholders, but corporate ownership is doubly taxed. Under certain circumstances, a "C" corporation can elect to convert to an "S" which is only subject to one level of tax.
Trusts – Trust arrangements (where title to real estate is held and managed by a trustee for the specified beneficiaries), are like a corporation or LLC, with recourse limited to the trusts assets.
Before forming your entity you will need to choose the ownership structure you desire.
NAMING YOUR ENTITY
Unlike the name that will be part of the marketing and branding of your building, entity names do not have to bear any relation to the project. In many cases the owner will choose some variation of the name or address of the property for the entity name. Something like “Lakeside Mall LLC”, or “123 Main Street, LP”. Sometimes the owner will choose a name that has no relation to the property for purposes of anonymity (since the entity will usually be represented by a registered agent rather than the owner, thus making the property unidentifiable in the public records). Conducting a corporate name availability search will tell you if the name you want is free to use in the state and will save you some effort during formation.
SELECTING YOUR REGISTERED AGENT
Often your attorney or outside law firm is forming the entity and will choose a registered agent for you. Likewise, an incorporation service may appoint a registered agent for you or you may choose a registered agent that is qualified for appointment in the state of formation. You should CHOOSE A REGISTERED AGENT THAT ENHANCES YOUR ENTITY MANAGEMENT STRATEGY. The ongoing data, documents and alerts that your agent gathers over time should be populating your entity management software. If the registered agent chosen by your attorney or incorporation service does not provide integration with your system, choose another. You should select your registered agent in the early stages because there are costs for changing your registered agent later. Real Estate Entity Services can help.
Where do you want the legal entity formed? Often the entity is formed in the state in which the property is located. For legal, tax or other business reasons, some owners form entities in Delaware or other business-friendly domiciles.
If you want a permanent address for your entity that is not your physical location, there is the option provided by some companies to set up a virtual office with mail forwarding and phone forwarding services. A virtual office is more commonly used for a business that does not have a physical office but it can be used for real estate.
CREATING ARTICLES OF ORGANIZATION (LLC) or INCORPORATION (Corporation)
Once an LLC or corporation name and registered agent have been selected, you complete the Articles of Organization or Incorporation. State requirements vary so you will need to include the following information in some form, no matter in which state your entity is formed:
The LLC or Corporation’s name and physical/mailing address
The LLC or Corporation’s registered agent and registered office address
The purpose of the LLC or Corporation
For an LLC, the organizer’s name and signature (the LLC’s organizer is the person authorized by the LLC to complete the Articles of Organization)
For a Corporation, the number of initial authorized shares or par share value
For a Corporation, the incorporator’s name and signature (a corporation’s incorporator is the person authorized by the corporation to complete the Articles of Incorporation). In nearly half of all states, you are also required to list the names and addresses of the initial directors
Once you know the entity structure you want, you know where you want the entity organized, you know the name you want is available, you’ve selected the right registered agent and have decided on the information in the Articles of Organization or Incorporation, the filing can be completed. Either your attorney, someone with company formation skills in your office or an incorporation service can file the appropriate forms with the Secretary of State or business licensing division in the state of formation. Most states allow filing online. Each state has its own licensing fee structure to be paid at the time of filing. As an example filing fees for an LLC range from as low as $40 in Kentucky to as high as $500 in Massachusetts.
Fees charged by incorporating services are usually very reasonable compared to hourly legal fees or the trial and error of doing it yourself. Given the low fees charged and the 50-state experience of several incorporation services, it may be worth the few hundred dollars to hire this skill set. It will certainly be faster than doing it yourself. Real Estate Entity Services can help arrange a good incorporating service that works well with a long-term registered agent to enhance your entity management strategy.
After filing and the payment of requisite fees and after the state completes its processes; your entity will become active. The state will send you confirmation that your entity has been created.
“ … thoughtful design and operation of an entity management strategy takes planning, organization and, in our opinion, most importantly: good entity management software.”
GET AN EIN
Every entity that will hire employees, pay taxes or open a separate business bank account needs an Employer Identification Number (EIN). An EIN is like an LLC or Corporation’ social security number.
ORGANIZE YOUR FOUNDATIONAL DOCUMENTS
It's essential that you organize your foundational documents for your entities. In the case of an LLC the Operating agreements are the documents that specify how you will run the entity itself. The Operating Agreement specifies who owns what percentage of the company, how profits are distributed, how management is structured and generally how the LLC operates. The LLC’s operating agreement is not filed with any state agency, it is an internal document. For a Corporation you will create bylaws, stock certificates, draft resolutions for corporate actions, banking resolutions, delegation of authority, inter-company agreements, etc. You will name officers and directors. You will sometimes appoint independent directors. You will establish stock ownership or membership shares for investors. These foundational documents and the information created in forming the entity needs to be organized, referenced and added to during the life of the entity. From this foundation you need to build the structure of entity management.
With the foundation complete, what’s next in building your entity management structure?
Although the process of creating one or one hundred entities is the same on an individual level, the construction of a proper entity management system to control multiple entities takes far more energy and skill. It’s like the difference between residential and commercial real estate: if you just own one house, where you live, there’s not much need for management infrastructure, but a portfolio of buildings is a different story.
For efficient entity management you need some type of framework and storage to organize and hold all of the entity data. As you operate your real estate business, you will need to retrieve and use this data and add to the data as entities change over time and different events occur in the life of the entity. The framework for a building is steel or lumber. The framework for entity data is entity management software.
Just as architecture drives the design and construction of a building, purpose-built entity management software drives the proper organization and data flow structure of your entity data. The right entity management software is designed specifically for the management and control of entity data. Data is defined properly and documents are organized logically. Thankfully, unlike the time-consuming process of constructing a building, entity management software can be acquired in a complete package … like a modular building.
If you have the proper entity management software, populating the software is easy enough to be done in-house but the opportunity to have this work done by others, especially for large back-file projects, is something to explore. The main advantage of outsourcing this back-file work is the speed with which the project can be completed. This is also where the selection of the right registered agent and incorporation service pays off. Between the incorporation service and the registered agent, all of the foundational data for your entities is captured at formation. If the registered agent and incorporation service are also able to integrate data into your software system, the overall process is the most efficient and probably most cost effective that it can be.
Your entity may require periodic or annual meetings of shareholders or the board, minutes, consents, capital contributions, dividends, etc. The entity itself requires the filing of paperwork and reports, renewal of licenses, updates and certifications. This is where an entity management software solution is invaluable in managing and maintaining your entities.
Good entity management software is built with automated alerts and calendar features that help manage the numerous events that take place during the life of the entity. Think of the entity management software as akin to a work order or preventive maintenance system in your building. You spend initial effort defining the timing and work requirements related to building maintenance over time. The management of your entities requires the same level of discipline and care. Good entity management software provides that management infrastructure for your entities.
Just like your building operation, you may not necessarily run the preventive maintenance or smart building systems yourself. This task is often delegated to the property management people or building engineers. Although easily done in-house, operating your entity management system does not necessarily need to be done by you or your staff. This function can be outsourced especially for the initial setup of the system. While property management may be an additional cost of operating real estate, it is a necessary function. Proper entity management is also a necessary function but if it is done in a professional manner it may save money for your organization.
Entity management for real estate is often an afterthought, something done by the attorneys or back-office staff. This lack of focus may generate extra cost and inefficiency in your organization. The thoughtful design and operation of an entity management strategy takes planning and organization and, in our opinion, most importantly: good entity management software. Good software is the focal point and framework for organizing your entity management processes.
Good news: there are entity management professionals providing software, incorporation and registered agent services that are integrated to provide you a complete solution to get control of your entities. Better news: the cost of a complete solution may be less than what you are spending now. Contact Real Estate Entity Services for a free consultation about your entity management needs and the opportunity to save money and improve efficiency.
How We Can Help
If you have the staff and organization to manage an entity management solution in-house, we can provide excellent entity management software along with training and implementation. Pricing for our software is very affordable and the first step to getting your entities organized.
If you do not have in-house resources, let’s discuss outsourcing the project management to get you organized, have your software populated, and have ongoing entity data delivered to you. We provide a free consultation to discuss your situation.
If you would simply like to reduce the cost of your registered agent or would like to engage an excellent professional registered agent, please contact us for a quote.
Please send us an email or call and let us know when is a good time to talk. Your email will not be published.
Disclaimer: Real Estate Entity Services is a service company and does not provide legal or financial advice. This article is for informational purposes only. Consult with your legal or financial advisor to determine how this information applies to you.