The answer to this question really depends on your investment strategy, and can be relatively simple to complex depending on a range of factors. However, complexity of your project aside, in one way or another you should consider the following:
Liability.
Limited liability companies, or s.r.o.s in the Czech Republic, are called this for a reason. Do you foresee a need to limit liability against a creditor, a wrongful debt lawsuit?
Investors.
Are you one or many investors? If you are one, this is perhaps less relevant. But if you are several, all engaged in a project of one or more units, there is often a clear advantage to using an s.r.o. as the shell for that investment:
- Simplicity of admission/egression of investors
- Scale of management and accounting administration
- Clear set of rules under the Commercial Law
Prestige/marketing
Usually, limited liability vehicles enhance the professional image of the project over a personally-owned project, regardless of whether there is one or more investors.
Cost of Administration
The cost of maintaining the accounting and statutory documentation of your investment through a legal entity can be significantly higher in a legal entity than if personally owned by physical person. (This is especially true for Americans!) Is this cost necessary?
Tax
Tax rates on real estate investments can be significantly higher in an s.r.o., which is subject to a 19% corporate tax plus a 15% withholding tax on dividends. Investors might be able to offset this efficiently if they structure their investment cleverly, but if not…?
More generally, consider the following when making an investment:
Does your business model produce cash?
An s.r.o. costs some money to form and maintain, and this will directly reduce your return on investment. If you will employ a director or a property manager or accountant, this too will reduce your yield.
The return of cash on your investment, and the sooner the better, is fundamental to success. Capital appreciation is no longer a likely source of return in most acquisitions. Models that feature early, repetitive cash inflows and lower, delayed outflows are going to maximize your internal rate of return, especially if borrowing can be done at advantageous rates. No matter what the tax structure, it cannot succeed if the underlying business model is weak.
The Economy
Economic conditions are weaker now than in years, with national deficit spending and rampant inflation of the money supply common in most every country. Job security is lower. Prices are rising faster than annual consumer price inflation adjustments, if included in your rental agreement at all, can match it. Measurements of yield and return based on fiat currencies are less than satisfactory … look to measurements in commodities like gold, silver, oil. This, BTW, will also enable you to compare investments in different countries and currencies.
Tax regulation
Tax rules, rates, exemptions, credits, deductions and eligibility change from time to time. Now seemingly constantly. In 2009 the thin capitalization rules in the Czech Republic – critical to any parent-financed loan to a subsidiary – changed three times. In the Czech Republic the government is contemplating raising personal and corporation income tax rates, raising property taxes and severely reducing the personal mortgage deduction. This is frustrating if you are trying to manage a long-term investment in real estate! Americans need to remember that the IRS will require annual information returns on certain foreign corporations.
Definitely consult a professional such as CFO2GO to review your project before you have taken irreversible steps. We would be excited to work with you.
