How To Get (And Keep) Your Entities Organized
What do you know about your real estate entities?
The status of the entities that hold your real estate is a mystery for many commercial real estate owners. Do you know if you are in compliance with filings for your entities? Do you know the renewal dates for your entities? Do you know the cost of maintaining your entities? Do you wonder “Why does it take so long to get a simple answer about the structure of my company?”
Understanding how entity management is handled by real estate companies and how entity management could be done better is what this article addresses.
Why do I need legal entities?
There are several reasons for creating a separate legal entity to hold your real estate. Although the majority of real estate in the U.S. is held by individuals rather than separate legal entities, professional owners with larger commercial real estate holdings use some form of separate legal entity to hold their real estate. There are several reasons for this:
Limitation of Liability - a separate legal entity can protect an owner's personal and other assets from liability that might arise in the operation of real estate. With the right corporate structure, liability is generally limited to the assets held in that legal entity.
Taxation - the income from real estate operations is taxed differently depending on the type of legal entity chosen. Limited liability companies (LLC's) and limited partnerships are not taxed at the corporate level but the tax liability is passed through to the individual members or partners at their individual tax rates. A regular corporation that holds real estate may be taxed at the corporate level and then the net income passed on to the shareholders is taxed at the individual shareholder's rate.
Anonymity - if desired, public records will not contain information on the actual owner of a property. Filings with the states will only give the public contact with you and your property through a registered agent.
Lender Requirements - in order to qualify for a non-recourse loan for a property, most lenders require that the real estate is owned in a separate, bankruptcy-remote entity. Most lenders also require that these Special Purpose Entities, (SPE's), be maintained throughout the life of the loan.
How were my entities created?
When you purchased or developed one of your properties, a new legal entity was formed. The formation of the legal entity was probably arranged by your attorneys either just before or when the property purchase was being completed. The formation of a legal entity is not difficult. You decide upon a structure, LLC, LP, S-Corp, etc., choose a name, draft some operating agreements, pay some fees and record the documents.
The creation of a legal entity is not difficult but it is outside the realm of normal property acquisition and management. As a real estate owner, you understand buying and selling and managing property. What may not be as readily apparent is what is necessary for the operation of the legal entity underlying the property.
What is required for the operation of the entity?
The separate legal entity requires a certain amount of attention. There are annual renewals, annual filings, meeting requirements, state and local taxes, renewal of registered agent assignments, license renewals and sometimes fees to pay. Besides the maintenance of the entity itself, there is often information about the entity needed for reporting, audits, and compliance.
How would you answer this quick quiz? Who is taking care of my entities?
B. My Attorneys
C. Either Dave or Jane or Mike in accounting (are they still with us?)
What your answer means:
“A” - Congratulations! You know what is happening in an important area of your business. You also know what you will be doing at annual report time and spring break (when most filings are due)
“B” – That may be good, but there are follow-up questions. What’s the cost? How and at what cost do you get your data and documents when needed?
If you answered “C” – Is Dave or Jane or Mike really on top of the task? Which part-time duty needs to be ignored to handle this part-time duty? What happens when this key person leaves?
What is the cost of entity management?
Like many business processes, there are the hard costs associated with entity management and the soft costs or hidden costs that are harder to determine.
Hard Costs include:
Registered Agent Fees – an annual fee paid (perhaps to your attorney or a to a third-party registered agent or possibly to both) to act as your entities representative with the state.
Entity Management Software - if you are using a software program to track your entity data, there may be software fees charged monthly or annually. If your attorneys are managing these processes for you, the cost of software may be bundled with their fees. If you do not have entity management software, there may be costs associated with maintaining excel spreadsheets or some other record-keeping system.
Attorney’s Fees - for oversight of the entity management processes.
Annual State and Local Fees - filing fees, franchise taxes, etc., that vary by state.
Late filing and reporting penalties and fees - are an indication that your entity management processes need attention.
Soft Costs include:
Employee Time - Dave or Jane or Mike or Your time dealing with entity management requirements.
Organization Time - gathering data from the states and organizing the data in software or spreadsheets.
Delays - in reporting while seeking entity information.
Erroneous Reporting - reputational or audit exception costs especially for a public entity
Transaction Delays – when seeking information on assets for-sale
Risk – Potential for entity dissolution and noncompliance
Hopefully, filing penalties or entity dissolution was not the first thing that brought your attention to entity management. Gaining an understanding of the cost of entity management is a difficult project in most organizations. If your law firm is handling the ongoing management of your entities, the actual hard costs may be buried within ongoing legal bills. Understanding the soft costs of entity management is an even more difficult task. If you do not know the cost of entity management to your organization, you may be surprised. There is a more cost effective way.
How to approach properly managing legal entities - software and services solution
W. Edwards Deming, a pioneer in quality control in business stated, “A bad system will defeat a good person, every time”. One of the biggest problems with entity management is that often there is no system at all.
The real business of real estate is buying, selling, building, leasing, financing and efficiently operating the properties, correct? The challenge with proper entity management is that the formation and management of the legal entities is an afterthought when acquiring or developing or managing a property. Legal entity structures and the administrative paperwork involved is perceived as not important until it is. Many companies do not address proper management of their legal entities until they are facing fines, penalties, noncompliance issues or entity dissolution that expose other assets to potential liability.
In most businesses, process management is a series of repeatable tasks combined with enabling technologies or software. Because entity management is often not considered a key function in commercial real estate companies, a systematic approach to entity management is not developed. As with most repeatable business functions, effective entity management requires software and services to achieve maximum efficiency and cost-effectiveness.
The first step to proper entity management is to establish a system. The easiest and most efficient way to establish a system is through the use of good entity management software. No need to reinvent the wheel as good entity management software already exists and will:
have a database to store information and documents,
have a calendar feature for storing critical dates,
show the relationships between owned entities within the company, and
house information on directors, officers, shareholders, and meetings.
Just like any storage task, obtaining the proper storage containers, labeling and organizing things properly and putting things where they belong is what it’s all about. Entity management software provides that storage container. Good entity management software also makes data retrieval and reporting easy and saves the company hours (if not days and weeks) when that inevitable reporting, audit or compliance fire-drill occurs.
The second step in proper entity management is to untangle and sort the data and documents. If you are already organized, that task can be fairly administrative. If your company has many entities formed over time and not concisely managed, this can be a daunting task – like cleaning your garage or attic. Given the resource and personnel constraints in most companies, a project to organize entity data often takes a back burner and often for years. The good news is, if you acquire the right software, it provides a roadmap for completing such a project. The better news: there are companies to manage the project for you.
The third step in proper entity management is to apply best practices; establish the automation of the capture of ongoing entity data. Capturing the ongoing data at its source is the most efficient way to gather data. The source of the data is usually the secretaries of state in the state of entity formation. The way the states communicate with the legal entity is through that entities’ registered agent. If the registered agent is connected to your system then data that is captured at the source can be communicated to your system. The best practice is to appoint a registered agent that has access to feed your systems.
What are the benefits of implementing a software and services solution?
The major benefits of implementing a software and services solution are improved organizational efficiency and cost.
With the proper organization of data and documents in a software package, reporting becomes streamlined and access to entity data throughout your organization turns from a fire drill into a self-serve task. With good entity management software, keeping track of due dates and alerts are automated. Also with good entity management software, there are additional features that may help your organization manage meetings and automate reporting.
When you begin to measure the real cost of entity management within your organization you are on the path to finding more cost-effective solutions. Peter Drucker, the father of modern management said - "You can't manage what you can't measure".
With the adoption of a software and services solution for real estate entity management, and after the initial onboarding and organization project cost, the costs of entity management become simpler, more transparent and easily quantifiable:
Our software and services solution
We combine entity management software and services to provide a complete solution for a real estate company's entity management needs. We use software as the organizing container for entity data. We help real estate owners organize their data and documents in the software. We provide registered agent services to gather ongoing entity data at the source of the creation of the data with the states. We also help create new legal entities for property or portfolio acquisitions. All of these entity management activities are provided at a cost that is transparent and will reduce the cost of entity management for your organization.
What we provide
Registered Agent Fees – priced under the cost of other nationwide providers with no additional attorney oversight fees
Software Costs – we include unlimited users at a fraction of the cost charged by the largest national providers or enterprise corporate solutions
Administrative Costs – are built into the annual Software and Registered Agent fees. Simple pricing with no additional billings
Annual State and Local Fees – passed through at cost
After some discovery and given certain volume levels, it is possible for us to provide you with an all-in, per-entity price for the organization. With on-demand reporting and more automated updates of entity data, your organization will see a substantial reduction in employee and organization time commitments, delays in reporting, late fees and penalties reducing overall organization risk. Your hard costs will be easily understood and your soft costs will be reduced or eliminated.
If you’ve recognized the issues briefly explained here, or you’re not sure about the status of your company’s entity management consider:
Who’s responsible for maintaining my entities in good standing?
How much does it cost to manage my legal entities? – Attorney fees, Agent fees, Report fees and the organizational soft costs?
How do I get my reports and action alerts?
Where are my data and documents?
We believe for entity management software should come first to provide the container and method for storing your entity data. Organizing that data in the software comes next and then setting up long-term ongoing data solutions completes the system.
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.