LLC, S-corp, C-corp? Tax Benefits...

Comments(8)

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  Stockpro998th September, 2004

  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
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  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 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. 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

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  Dumdido8th September, 2004

  Stockpro -
  Thank you for this information. It is a begging for me on a topic that is completly forgien.
  Do you have any advice on how to go about setting up an LLC and a Land Trust? You said "Many lawyers don’t understand land trusts". How do I find a good attorney? About how much should I expect to be charged for this service?
  When setting up a Land Trust - do you put you personal home into it, or just the investment property?
  
  Thank You For You Advice!!!

• 
  mkdurham8th September, 2004

  StockPro-
  Thanks for the detailed information. It is all very helpful.
  
  But to regain focus and to expedite the process ... I reiterate that I do not own property and merely want to establish an LLC or corp. specifically for note brokering.
  
  In this case ... what would you recommend? There is so much information to digest right now that I simply want to take the most direct and effective action simply for tax purposes and protection. I like the LLC idea because I do not have to involve anyone else if my state allows one person to establish them. I will check on that. Right now, I'd rather not involve anyone else in establishing the business. I'm not sure I even need to establish one anyway for just a few notes coming my way in the immediate future.
  
  I will check out the websites you mentioned.
  
  Thanks for getting back to me.

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  kasm8th September, 2004

  Thanks for posting all this great information. I went to see a lawyer yesterday to discuss setting up an LLC. He as an IDIOT!!!
  
  All he did was try to talk me out of investing in real estate. His parents had apartments all their lives and it did not benefit them in the least. I wanted to shout in his face, "well maybe of they had been better business people you would be rich now."
  
  Also I had to go by myself as my husband had to work late and also had to take my son becasue my babysitter cancelled out the last minute. He probably thought I was some dumb broad with a kid. In retrospect I should have cancelled. I was so frustrated in the end.
  
  Anyway, I called some CPA firms in the area and asked specifically if they delt with clients who had real estate and who worked out of corporations. I may have found one and set up a meeting for next week. I am printing out your information and re-reading it and taking it with me.
  
  Wish me luck.
  
  Kim

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  patrecejames8th September, 2004

  Thanks for all the info stockpro, according to what you are saying I am interpreting that you would suggest a LLC for holding and a "S" Corp for buying and flipping, am I correct ?? Also, how should one take profits from a "C" corp to avoid double taxation?
  
  _________________
  "there are always options, we just have to look for them"[ Edited by patrecejames on Date 09/08/2004 ]

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  Stockpro998th September, 2004

  Hi Patrice,
  
  YOu can get real creative with corporate stacking at times though you may run the risk of having it classified as a "control group" by the IRS. In a C corp you take the money out in benefits to the officers (you) may let the $$ build at 15% tax rate and then purchase larger real estate In A C corp there are more allowable deductions.
  Actually there are a lot of different things you can do but generally speaking the LLC is great for protecting assets like RE, but you want your profits out in an S Corp so you save on self employment taxes. SO you are correct.
  Bill Bronchick has great information on this as well.
  
  
  
  [addsig]

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  Stockpro998th September, 2004

  MkDurham,
  
  I would say form an S corp. You have no "real" assets involved an will get some protection as well as the benefit of the self employment tax reduction as you take majority of profits out in capital gains
  [addsig]

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  patrecejames8th September, 2004

  Thanks for making everything so much clerarer stockpro.
  [addsig]