A Quick Comparison Of Business Entities

A QUICK COMPARISON OF SEVERAL BUSINESS ENTITIES

Asset Protection
Between 80 & 100 million lawsuits are filed each year & you have a 5 times greater chance of being sued than you do of going to the hospital for major illness or injury this year. The reasons for these suits are endless, sexual harassment form an employee. Discrimination; because you mentioned “you prefer married couples” to prospective renters. The couple you rent to cooks meth, catches the house on fire and burns the neighbors house down too. A deal goes south and the other party thinks you owe them something… The name of the game is to protect what you have worked so hard for from people that “want something for nothing”, your money…


Sole Proprietor

This is the most common business entity. It requires virtually no paperwork to start doing business in this fashion. It offers “no” protection from lawsuits, and has the most limited/poor tax benefits. There are no allowances for fringe benefits etc. If a tenant slips on the stairs at your property, or your business is sued you have no protection whatsoever for your personal assets. You and the business are the same and all your assets are at risk..

Partnerships

Even worse than a Sole Proprietor, you are held liable for anything stupid your partner does. If he files bankruptcy you can be held liable under the doctrine of joint and several liabilities. Use a case by case “Joint Venture” agreement, LLC, C, S, Corp. rather than a long term partnership agreement.


Corporations

Corporations require more paperwork to start up and manage but can easily be set up by the individual (however I say why go through the hassle? Pay the $100 for any of a number of companies on the web to do it for you. http://www.corpco.com http://www.sbincorporationservices.com you get the idea).
Where in an SP you and the business are the same person and everything is exposed, a corporation is a person created by law and its own entity. When proper procedures are maintained there is a shield between you and your personal assets. Creditors are limited to the assets of the corporation.
Certain formalities should be maintained to keep your corporate protection strong and keep creditors from piercing the corporate veil. Discuss this with your attorney & do further research for yourself.
At a minimum you should do the following (I didn’t the first time I set up an entity and fortunately was not called on it).

1. Fill out a corporate minute book.
2. Elect board of directors/officers.
3. Issue stock certificates
4. Obtain EIN# from IRS
5. Open bank account In Corporation’s name.
6. Hold yearly shareholder meeting (over lunch with your wife  )
7. Have a physical office & lease (your garage, bedroom, den,)
8. Have your phone in the corporation’s name.
9. Get licensing in corporation’s name.
10. Be funded sufficiently for doing business on day to day basis.
11. Make sure you sign everything as an officer of the corporation i.e. Joe Investor “president” always designating your corporate capacity.

This can all be done in about 2-3 hours a year. I would suggest further reading on these entities or purchasing a course http://www.legalwhiz.com you might find a used one on Ebay. From the research I have done William Bronchick is a leading authority on asset protection and tax law for real estate investors. Talking over your structure etc. with a CPA and lawyer is always a good idea.

There are two types of Corporations “S” & “C” I shall give a very brief look at them and list only a few of the advantages. Do some reading and get competent help from your CPA/Attorney.

A “C” corporation files a tax return and pays taxes on its profits. The “C” corporation then distributes dividends to the shareholders (avoid taking profits in a C corp. this way to avoid double taxation). A C corporation offers the most tax benefits if you are doing enough business to justify the expense.

Benefits: Protection of personal assets and liability from acts as director of corporation-privacy-deductible life insurance plan for $50,000- deductible dental medical plan- deductible premiums for disability insurance- 1 person required to incorporate-tons of deductible “fringe benefits” like pizza in the workplace when working after hours (did I mention that your den can be your workplace/office? See above).

An “S” corp. is treated like a partnership for tax purposes and files a K-1. Unlike a “C” corp. you want to take profits in the form of dividends to avoid the 15.4% self employment tax. A huge benefit.

Benefits: S corp. losses can be deducted against ordinary personal income in excess of $50,000 per year(like a spousal income)-Reduce payroll taxes by reducing salary to lowest reasonable amount and taking profits in dividends saving 15.4% self employment tax on up to $87,000 I n 2003-Privacy-Lawsuit protection for personal assets and liability-benefits/write offs for employees-only needs one person to create.

Limited Liability Company

The newest of a breed of entities created by state statute requires filing articles of organization through the state where started. It can have 1-2 members depending on your state statutes. This files a 1065 with the IRS like a partnership. When proper procedures are maintained there is a shield between you and your personal assets.
This is the tightest entity for asset protection (in most states). This is because a member’s interest in an LLC cannot be attached by a creditor. If a creditor gets a “charging order” against you for 100k the managing partner could withhold paying you out of the LLC’s assets etc. indefinitely. After years of frustrating the creditor you could settle for less. Generally these have many of the same things that need to be done as a corporation to avoid “piercing”. In my personal opinion I think the best way to hold property is in a trust with the LLC as the beneficiary.

Land Trust’s- Intervivos

This is a great tool for the investor and owner of property. A land trust offers no protection from creditors or lawsuits outside of a corporation or LLC. What it does is remove the property out of your name on the county record books. It reminds me of when I was in the infantry, you use a smoke grenade to keep the enemy from seeing you but it won't stop a bullet. You have the legal right to place property in trust and the bank/mortgage company has to allow you to do this. They cannot invoke DOS. In my opinion this could be an excellent way to take title in a “Subject To” deal. Look up the article on this site “What’s A Land Trust & Why You Should Remove Your Name from the Deed”.
Many lawyers don’t understand land trusts, this is good because it helps you hide what you have. When an attorney looking for “deep pockets” does a cursory asset search he will find nothing in your name. If he can’t find property with equity, insurance, etc. he will not take the case on contingency. He will probably ask for a retainer of 3-5K non refundable against his $250 an hour fee. This deters a lot of people. In the event a creditor or the IRS gets a judgment against you and places a general lien at the courthouse in your name it will not automatically attach to your properties held in trust.

Final thoughts

With the inherent risk involved of a lawsuit, and the incredible amount of money you will pay in your lifetime in taxes a fair amount of time and research should be taken to mitigate these drains on your resources.
I am not an attorney or CPA so these are my opinions and what I have learned through research and personal experience. I am sure you will teach me more that I can use in my own business.

Randall




_________________
Winners are not afraid of losing. But losers are. Failure is a part of the process of success.
People who avoid failure also avoid success.
Kiyosaki

[ Edited by Stockpro99 on Date 09/05/2003 ]