LLC, LLP, Corporation, or not?
I have decided to become a REI, and my plan calls for buying and holding as many rental properties, as I possibly can, and have a Management Company run them for me.
Is it better to hold these properties as personal holdings, or should I form a LLC, LLP, Corporation, Etc, for all properties, or form a separate entity for each piece of property individually? What would be the pro's and cons of each scenario. Any guidance would be greatly appreciated
This question was originally posted in the Landlord Forum, and moved to this forum to receive the appropriate exposure.
I am eager to see what some of the pro's have to say about this subject. From my research so far, I think my strategy will be:
Buy property and put each in its own Land Trust. This helps protect me and still allows for tax benefits.
I would then have an LLC or C-Corp (leaning toward C-Corp) setup to be my property manager. The C-Corp would collect rents, pay expenses, etc. Whatever is left over would be taxed at a lower rate than if I had taken the profits myself.
You mentioned that you would have a property management company manager your rentals. Did you mean someone elses' PM Co. or your own? If someone else, and you are getting started, why?
Ho...
Ask your CPA! I struggled with this question at the beginning. Bottom line: only your CPA can answer this question. In fact, I'll bet you a nickle your Real Estate Attorney will refer you to your CPA to find out what instrument will work best for you, then, he'll be glad to form the entity for you for a handsome fee.
Everyone's situation is different. It's just not that simple. A good accountant will be able to hammer it down in less than 30 minutes when you discuss all of your plans. Then, have your attorney form the entity. All things being equal/general, an LLC will provide you with the pass-through income (thus avoiding double taxation) and keep your assetts off of a schedule E, which you want to avoid, if at all possible. Spend a few bucks to get the right advice. This is one topic nobody on a forum can aptly asnwer. Talk to your CPA.
Quote:Buy property and put each in its own Land Trust. I would then have an LLC or C-Corp (leaning toward C-Corp) setup to be my property manager. The C-Corp would collect rents, pay expenses, etc. Whatever is left over would be taxed at a lower rate than if I had taken the profits myself.HoGiHung,
There is a detail you overlooked here. "Whatever is left over" is cash flow which your management company disburses to the property owner. You, as the property owner (you are the beneficiary of the land trust, aren't you?), are taxed on this income at your ordinary income tax rate. Even if you allow the management company to retain your cash flow in a corporate escrow account, the IRS will still consider this as your earned income. Accordingly. the 1099-MISC you receive from your management company should include these escrowed funds in your statement of earnings.[ Edited by DaveT on Date 01/20/2003 ]
Very good feedback. As my post indicated, what I outlined was what I think my strategy is. It evolves as I learn more and more.
I'm meeting with a RE Attorney this week and will seek his/her advice on tax issues. Most likely I will be referred to a CPA (who I need on my team anyways) and then we can see what works best.
Like it has been said over and over on this board, for this type of question, seek the advice of a professional. My response was only to get you thinking. To get you to ask questions to learn more.
Ho...
Thank you all for yor replies. I have appointments with both my CPA and my lawyer, to discuss this further with them. The properties are in a different state in which I reside, that is why I am using an outside Prop Mgmt Co. to manage the buildings.
Let me tell you what Bill Bronchick told me about circumstances very much like yours.
I asked how to deal with the asset protection and liability issues with several out of state rental properties. His suggestion was to title each property into a separate land trust. Create an LLC in your state of residence, and make the LLC the beneficiary of the land trusts.
A CPA expanded on this approach by suggesting that the total equity of the LLC's beneficial interest be limited to about $250K. Create as many LLCs as you need to "beneficially own" all your properties -- keeping the equity in each LLC at or under $250K provides further asset protection by limiting your liability to just the assets "owned" by the LLC.
Hope this helps.[ Edited by DaveT on Date 01/22/2003 ]
Dave T,
Very helpful info, Thanks!!!
Mike
Hi,
I have a quick question about the land trust thing. If you put your assets in a land trust with LLC as beneficiary, would you make yourself trustee? I know this may seem to be a basic question but you have to start somewhere, right? Thanks for all of your great posts, I'm learning a lot all over this forum!
[addsig]
Great information! I'm learning a lot. Just wanted to know if anyone had any suggestions about how to go about finding a good CPA or lawyer for that matter?
Are there any specific questions that should be asked? What do you all look for before deciding on someone?
lynx102@aol.com
Hi cjrs! John Locke wrote a very good article entitled, "Hiring a Real Estate Attorney". Go to "Articles" on the tabs and type in the title of the article. Good luck!