So you’ve decided to become a real estate investor and now you’re trying to figure out the next steps. More specifically, you want to know “Do, I need a business license to be a real estate investor.”
It’s great news that you’ve made the decision to take the next step toward becoming an investor. But, as with most things with real estate, if you need a business license or not will depend on what you plan to do and how you plan to do it.
So, let’s dig in a little bit. But, please note, this information is for informational purposes only. You should consult with an attorney and accountant to get actual advice on the formation of your business.
What is a Business License?
According to InfoBloom, a business license is:
A type of legal authorization to operate a business in a city, county, or state. A license may even be required on a federal level. Typically issued in document form, the license gives a business owner the right to conduct entrepreneurial activities as set forth in the license application.Infobloom.com
Requirements for a business license do vary by state and even by municipality. So, there is no hard and fast rule that works across the entire United States.
Additionally, some business activities require special licensing before you can conduct that business. Examples could be a stockbroker (series 7), real estate agent (sales agent license), plumbers, inspectors, etc. All of those require special licensing above a generic business authorization you may get at the county.
Do I Need an LLC or Corporation?
In the United States, you are in business for yourself the moment you conduct any business. If I sell a piece of gum to a friend, I have just conducted business under my own personal name.
I can record the cost and deduct it from my revenue. Then, I’m legally obligated to report these earnings to the IRS.
Doing business like this is called being a Sole Proprietor. This is any business you do with your own name.
If you grow a business or if you have a substantial amount of assets you’d like to protect, you may choose to do business in an LLC or corporation. These entities don’t change much about your business other than asset protection.
So, the answer is – NO you generally do not require an LLC or corporation to do business, but it’s probably a good idea.
What is a Doing Business As (DBA)?
Any time you conduct any business and are not using your own personal name, then you need a DBA.
For example, if your name is John Smith and you decide to conduct business and call yourself “The Real Estate Guru”, then you’d need to file paperwork with your municipal government. It would register that John Smith is Doing Business As The Real Estate Guru.
What Niche in Real Estate Will You be in?
The first thing you need to figure out is exactly how you will be investing in real estate. Ultimately, there are hundreds or even thousands of niches of real estate, and each will have different requirements.
In general, we can break down your investment strategy to either Passive or Active, then we can narrow down your requirements from there.
A passive investor puts money to work by purchasing property, investing it with other people, lending it out, or doing any activity where you expect to passively earn without actively providing much work day-to-day.
A good comparison to this would be like investing in stocks. You might put some initial work into discovering which stocks you want to invest in, but once you do that then there is very little work that is needed to maintain your investment.
The only major decision you have in the future is to invest more, hold what you have, or sell and take profits or losses off the table.
In general, if you are investing passively and not actively engaged in business, then you do not need any licensing.
In general, when people say they are “real estate investors” they mean it more as a business concept than a true investment. For example, a house flipper will say they are a real estate investor whereas nothing about house flipping is an investment.
- House flipping is taxed as ordinary income.
- The costs for the repairs are accounted for as COGS (Cost of Goods Sold).
- And you are actively conducting work, repairs, etc.
The point is, there is no investing activity in this “real estate investing” business.
In general, if you are conducting an actual business and creating products or services for sale, then you may require some sort of business license to operate. We’ll get into some more detail in the next section.
Do You Need a Business License to Invest in Real Estate?
So, as a rule of thumb, if you are passively investing you probably don’t need any licensing. If you are actively working in a business to grow it, then you probably need some sort of paperwork or licensing to conduct your business.
When Do I Need a Business License?
If you own rental property and simply collect rent and conduct some repairs on your property, you generally do not require a license.
Wholesaling is an active business that requires advertising, mailing, cold calling, etc. You will most likely require a business license or DBA (Doing business as) filed with your local government.
Wholesaling has come under more scrutiny over the years and some states are even starting to require more licensing than before. Some states now require wholesalers to become licensed real estate agents. So check your local state laws.
This will depend on exactly how you conduct your business. But, in general, you will probably need to file for a business license or DBA.
This is because most home builders are required to offer a warranty on work. So, even if you hire a subcontractor who pulls all the permits and does all the work, you will be the one required to fulfill any obligations under that warranty.
And, as a homebuilder, you will almost definitely need to file your business paperwork with the state or local government.
If you manage only your own property and no property for anyone else, then you most likely do not need to file. But, it may still be a good idea if you have a property management company in place for liability reasons.
If you manage property for other people then you will require a formal business to be set up, DBA, and possibly even a real estate agent license.