When starting out in real estate investing and accounting, one can create many business structures. At REI Hub, the most common setup is single ownership, also known as sole proprietorship. In fact, for many real estate investors, it’s the default ownership structure.
Maybe that’s because sole proprietorship accounting is the most straightforward version of bookkeeping. Compared to other structures, there are many fewer additional factors to consider, such as shareholder agreements or employee payroll and taxes.
To dive deeper, this article will explain what it means to be a sole proprietor, bookkeeping for a sole proprietorship, and the characteristics of a sole proprietorship.
Key Insights
A sole proprietorship involves engaging in business activities without registering a separate business entity. In many cases, these activities include side hustles that you haven’t officially registered as a business. Because the business isn’t registered, business assets and liabilities are not separated from personal assets or liabilities on your tax return.
Even if the IRS does not mandate that separation at tax time, it’s helpful to maintain this disconnect in real estate investing and rentals. Separation offers a more precise delineation between what belongs to the owner and what belongs to the business in financial or tax matters.
Ultimately, sole proprietorship accounting for a real estate business must track your rentals’ income, expenses, assets, and liabilities. Property management or real estate accounting software can help ensure accurate numbers when you hand them over to a CPA for tax filing.
Characteristics of Sole Proprietorship
One of the most popular questions in sole proprietorship accounting is the difference between sole proprietorship vs. self-employed.
While sole proprietors are also self-employed, the term sole proprietor refers to one person independently owning and operating a business. They don’t file any paperwork to separate personal and business assets.
The term self-employed is much broader, including ownership partnerships and multiple business structures. Sole proprietorship business examples include investing in real estate, freelance writing, creating and selling art, personal training, landscaping, or consulting.
In real estate, a person owning a rental property might rent rooms to their buddies. Their friends pay them directly, and as the only owner of the house, they operate as a sole proprietor. If roommate issues arise and one sues the owner, the lawsuit can affect everything the owner has.
That said, a typical business structure for real estate investors is a limited liability company, often called an LLC. A single-owner LLC operates similarly to a sole proprietor. The difference is an LLC provides separation between the business and the owner. That separation makes it less likely for the owner to be held personally liable in lawsuits. For example, a lawsuit could go after a business’s assets but exclude personal ones.
To determine the best ownership structure for you, check out this guide for rental property businesses.
What is sole proprietorship accounting?
As a sole proprietor, you are singularly responsible for all the decisions your business makes. In real estate investing, you are also responsible for the accounting and bookkeeping of your business.
Sole proprietorship accounting is vital for a real estate business. The IRS requires total revenue and expense reporting. For many real estate investors, their Schedule E will include these figures for each property.
Some investors choose to work directly with a CPA or certified bookkeeper to track revenues, expenses, and liabilities. If you utilize a property manager, these services might be included or offered as add-ons.
Keep in mind that bookkeeping services can be expensive. These costs can be prohibitive if you’re just starting out building a real estate portfolio and trying to keep costs lean. In that case, these bookkeeping costs might not be in the best interest of your budget.
Thankfully, there are many options for keeping your books. If you use landlord software, many solutions have a section for basic expense entries. Then, rent collection through their service totals the revenue. With a small real estate portfolio encompassing one or two properties, some people can simply track revenues and expenses through a spreadsheet or rudimentary budgeting tool.
For more extensive portfolios, or if you have expansion plans to start tracking more advanced accounting, such as assets, depreciation, and renovations, platforms catering to accounting software for sole proprietorships might be helpful.
Tips for Operating a Sole Proprietorship
If you’re a sole proprietor looking to add more separation between your personal and business assets, setting up an LLC is imperative. If possible, move the rental properties into the LLC’s purview.
Creating a new LLC has a slightly different process in every state. At its most basic level, you’ll need to choose a business name, appoint someone to give and receive legal documents, file an article of incorporation (sometimes called a certificate of formation), and get an employer identification number or EIN. From there, you can apply for a business license with state or local governments. For more info, check out this guide on creating an LLC for property rental businesses.
Additionally, creating new bank accounts or credit cards for the business specifically helps to separate these assets and prevent the commingling of funds. Within the scope of sole proprietorship accounting, commingling of funds simply refers to mixing personal and business money in the same accounts.
The Importance of Separation
Lack of separation muddies the water between your personal and business expenses and doesn’t accurately depict your business’s health or financial standing. Without a clear understanding of your rental properties’ profitability, expanding your business to buy new properties, investing in larger projects like renovations or significant repairs, seeing if you need to make any adjustments, or even bringing on new partners and investors will be hard.
An established LLC will help as you expand your business to include new partners and investors. According to the U.S. Small Business Administration, a sole proprietorship can only include one person, but LLCs can have one or more owners. You can add new partners and owners to your LLC, business bank accounts, and business license(s).
How REI Hub Can Help
REI Hub is a specialized rental property accounting software for real estate investors. Streamlined features like data imports, transaction matching rules, and batch-booking transactions ensure no headaches when categorizing revenues, expenses, and liabilities.
Customizable reports such as net income statements (often called profit and loss statements or P&Ls), operating cash flow, net operating income, and balance sheets are essential for evaluating the profitability of real estate investments.
Reports like Schedule E and fixed assets schedules help ensure you don’t overlook easily missed deductions. Ultimately, an accurate and complete financial picture of your business helps to ensure error-free sole proprietorship accounting.
At REI Hub, we take customer support seriously and want to ensure you get answers to your questions. Ultimately, we want you to feel confident using our software and empowered to be your own bookkeeper. We tailored our system to real estate sole proprietorships. It’s built from the owner’s perspective and is easy to learn with no previous bookkeeping experience.
Plus, no credit card or commitment is required when creating a free trial account to start so that you can evaluate the software and bookkeeping tools for yourself. You can also check out our publicly available demo portfolio or read through our Knowledge Base and blog.
Sole Proprietorship Accounting FAQ
What is a sole proprietorship?
A sole proprietorship is a business run by a single individual. There is no separation of personal or business assets or liabilities.
Can sole proprietors have 1099 employees?
A: Yes! A 1099 is a tax form used when individuals or companies are paid $600 or more during a calendar year. Tax forms like 1099s are most commonly issued to repair companies, cleaning businesses, and accountants.
Is an LLC a sole proprietorship?
No, an LLC is not a sole proprietorship. An LLC is structured to separate an individual’s personal assets and liabilities from the assets and liabilities of the company.
