Joint Tenants is the short version for “Joint Tenants with Rights of Survivorship” sometimes noted simply as JTWROS and requires at least two people. Ownership as joint tenants means if one spouse or partner dies the asset is automatically transferred to the remaining owners equally. Owners in joint tenancy share equally the income, expenses and liability.

Holding title as joint tenants means all owners must take title at the very same time and their names appear on the title report. An individual owner can’t sell any interest to third parties without affecting the other owners.

Several owners may hold title as Tenants in Common. Owners may be added to title at a date past the original sale and there really is no limit how many owners there can be. Each owner may own a different share of the property based upon the owner’s original agreement. One owner may own 50% of the property while two others own 25% each, for example.

If one of the owners dies, the property isn’t transferred to the other owners as is the case with joint tenancy but instead ownership is transferred to the owner’s heirs, typically after a probate hearing.

A sole proprietorship is the most common of business entities for a small business. All it takes to legally form a sole proprietorship is to file a Fictitious Business Name with the county recorder’s office giving you the legal right to operate under a business name.

However, whatever actions your business takes you are personally held liable as well. If you’re operating as Big Shot Rentals and you’re on your way to a rental and cause an automobile accident, both your business and personal assets are at risk. If Big Shot Rentals is sued, you’re sued and your personal bank and investments accounts might be at risk.

A limited liability corporation, or LLC, is a type of corporation that separates business activity and your personal assets. With Big Shot Rentals, LLC, the business would be liable and the company’s insurance policy will cover claims. Your personal assets are shielded from any business activity.

As it relates to income taxes, all income is passed through the LLC without being taxed and is taxed at the individual owner’s level.

This is the traditional method of incorporation, commonly referred to as a “corporation.” This is a separate business entity that protects personal assets from claims arising against the business. A corporation has individual shareholders and income is taxed both at the corporate level and the individual shareholder’s level. Income is taxed twice.

Corporations are rather expensive to form and require quite a bit of documentation and record-keeping along with annual meetings of officers and shareholders as well as corporate minutes taken and recorded. The cost and time it takes to form and maintain a corporation has made an LLC the more attractive option for most, not to mention income being taxed twice in a corporation.

Why form a business entity at all?

Simply put, to separate your personal assets from business assets. An LLC or corporation can be sued for any harmful business activity yet the claimants cannot come after the personal property of any of the business owners. A sole proprietorship provides no protection whatsoever from your personal bank account.

You do have liability coverage but if the claim is greater than what your policy provides without operating as an LLC or corporation your hard-earned assets can be seized. There are some clear benefits to operating your real estate investment business by forming a business entity that creates a wall between business activities and personal property.

1. Title documents all legal owners of a property
2. Joint tenancy provides a right of survivorship
3. Tenants in common may have unequal ownership and no right of survivorship
4. Sole proprietorship allows an individual to operate as a business but personal assets may be at risk
5. LLCs and corporations build a legal wall between business activities and personal assets