Should I Incorporate Myself??
I am a newbie and looking to gather a lot of information before i make my first purchase. A Question for anyone who can help me... I have read that there are advantages taxwise, lialibily-wise etc. to being incorportated when you do business. Do you think its advisable to do this stuff under a company name, or is that overkill? Have any of you here incorporated yourself and buy properties or tax liens under a company name? if so , what are the pros and cons to doing it that way?
All comments are much appreciated. Peace.
I recommend that you form some sort of entity for liability protection, but there are many issues involved, including long term tax issues. I highly recommend sitting down with a corporate attorney and getting the micro and macro picture before you move forward.
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conga321,
"I am a newbie and looking to gather a lot of information before i make my first purchase. A Question for anyone who can help me... I have read that there are advantages taxwise, lialibily-wise etc. to being incorportated when you do business. Do you think its advisable to do this stuff under a company name, or is that overkill?"
IMHO...This is Your 1st REI...Yes, I think it's ....in YOUR words "overkill"
"Have any of you here incorporated yourself and buy properties or tax liens under a company name? if so , what are the pros and cons to doing it that way?"
I have not....BUT that's me!!
If you Inc. it ...When you buy in a corporate name...be prepared to supply your corporate tax returns...Oh, Your NEW....OhWell!!!
....think about it!!!
ReadingForYou:
LLC is very similar to Subchapter S
not subject to strict organizational restrictions on S Corporations, e.g. who can be a
shareholder, are there too many shareholders, kinds of securities issued
LLC members can include certain LLC indebtedness in the tax bases in their LLC
membership interest which enable them to treat a greater proportion of distributions as
a nontaxable return of capital rather than taxable capital gains, and to deduct on their
individual tax returns a greater amount of losses of their LLC, subject to the passive
loss and at-risk limitations.
LLC members, unlike S Corporation shareholders, may be able to take advantage of
adjustments in their tax bases of the LLC's assets upon the transfer of interests in the
LLC. Because the tax attributes of the LLC and its members and the comparison
thereof to other entities are extremely complex, reference should be made to the tax
literature for complete information on this subject.
An LLC organized under the LLCL may be formed for any lawful business purpose or
purposes except those which require another business entity or natural person to be
formed or used for such business. [Section 201]
Not intended for not-for-profit activity (likely)
Uses "Articles of Organization"
....as always,
GoodInvesting, Rocky
conga321
Check with your accountant. He can advise you on the best way to go.
Good luck
Housebyr
Have you read "Inc. and grow rich"? A good source of info for you however it's a little outdated. Not much info on LLC's which might be a better way for you to go depending on what you want to accomplish. I like the other reply which directs you to a corporate attorney for direction. I'm a newbie too but don't intend to be for long. Learn all you can and jump in, I know I am. Best of luck. null
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2000rocky,
thank you for the outline. It was beneficial and gives one reason to do a little homework before making a decision and before consulting an attorney - so that we get our moneys worth when speaking to an attorney - after all they do charge by the hour.
I like C corp's fpor the first 50K in profits. They are a lot easier to write off things in. and they are the lowest audited entity )(.27%) vs a 5-7 times greater chance in an LLC.
I favor an mix of the two. With one being either a Wyoming or Nevada Corp and having no state taxes.
It is a great way to protect assets and save money on taxes.
Have the out of state entity (corp) pay all the bills etc. and pay that entity through your LLC. There are also various equity stripping things you can do to shield assets.
I have set up corps and LLC's by myself no problem for <$400 usually an llc is in the neighborhood of $250.
A few very basic strategies are listed in Bronchic's book "financing secrets of a millionaire real estate invesetor"
Much more can be found on the web. Before I go here is the difference this year for me.
With only an LLC. I pay 22,375 in state and federal taxes. with a corp around $8500. YOur Call
These can be set up over the net or through a local stationary store with legal papers and an hour or two at the library if you need to.
An area I am weak in is land trusts, I would like to learn more about those and hope that they are covered in an asset protection course I just purchased or that one of you directs me to a book with in depth coverage.
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I myself am incorporated but it's because I'm a building contractor. It helps liability and taxwise for me. Now when I buy a property it goes into a trust. The corporation then does the work. You can never have enough protection in my books. If you're not really in the business just looking to invest a bit here and there, I'd go through yourself unless it becomes more than part time. If you go through yourself there's also the Homestead Act to consider as well. I believe it's available in all states and protects you from creditors.
Conga321:
I am a newbie and asked a couple of attorney friends of mine about structuring an entity and both thought LLCs were probably the easiest to work with.
LLCs.................
Just wanted to add to some really good posts.
Recommend real estate be held in an LLC. or family limited partnership ( believe LLC is cheaper) You might then have a "C" Corp manage it and the C Corp offers you a number of tax advantages.
Recommend a couple of books:
1) Real Estate Loopholes By Diane Kennedy & Garrett Sutton
2)Protect Your Estate by Esperti & Peterson
I am also exploring Land trusts as they may offer a "cheaper alternative" for assets that we intend to hold for long term.
Suggest you read some good books , draft your real estate game plan (rough), phone a couple of lawyers or get recommendations for lawyers who do a substantial amount of real estate work, book a 1 hr interview & decide on your preferred structure. Phone your accountant to tell him how you plan to proceed & make sure he is on Side. Do it.
The professional advice will cost a little money but it is cheaper than solving the problem as you are personally being sued & all of your assets are at risk.
Good luck
Rob
Depends on your goals and what properties or other business ventures you are in. It also depends on your state.
LLC's are good in TX - you have two options of being considered a corp or not with this form, Corps (inc or ltd) they give you more tax breaks and personal (or should I say employee) benefits.
Limited partnerships are more risky but not a bad deal for some of the benefits that pass through to you and if you are linking this with another enitity as the controling interest.
I use them all. I also have GP & a SP, I use them all for different things for different reasons and you can limit their "life" span for what ever purpose you are chosing to use them. Then they just go away.
It is always best to get an Tax attroneys opinion and CPA's. But get a couple different ones unless you have advisors that you already work with and "KNOW" what you are doing and what you need.
I agree with most (based on past experiences) that a "legal" idenity is the safest way to do your "business". But if you are just dabbling why bother. This still is a personal decision that you must look into and decide what you believe will work for you, where you are and what you intend it for.
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I would definitely recommend garrett sutton's "Own your own corporation"
He hits the nail on the head. Talks extensively about corps and LLC's.
Would personally recommend C corp. Primarily because I think (IMHO) that it offers more protection of personal assetts. My #1 fear in business is being sued because I'm the 'fat cat' Real Estate Investor.
But that's just my opinion. I could be wrong.
Ronnie
If you want to get mortgage as a company (LLC, Corporation or whatever), it will be difficult to do so. Only a few lenders that I know will lend money to a company to buy real properties, and it will be lower LTV. I think it is better for you as an individual to buy properties and for tax purposes, you should form a LLC or S-corp. I like LLC or S-Corp format, since business liablities stay with your business. Another words, your business creditors cannot come after your peronal assets. If your LLC or S-Corp shows net loss, it can be offset your ordinary income that you make from your employement. So, if you make $30,000 from your regular job, and if you have loss of $25,000 (it is very easy to have loss because of depreciation) from your LLC or s-corp, you will probably not have to pay any income taxes at all.
Hi,
I plan to set up a single memebr ,LLC.
If I set up single member LLC,
Can I do away with first shareholder meeting since I am the only member?
If it is a must to have first shareholder meeting,can someone help post sample minute of such meeting?
Where do I get sample of operating agreeement?
Thank you.
I have formed a LLC and it has worked well for me. The properties are still in my name, though by 2004 or 2005, I should have tax returns strong enough so that I can buy properties in the LLC name. The problem with buying them in my own name is the fact that the liability is still with me persoanlly - not in the company. I will argue the point that all expenses and profits went to the llc and that we had seperate accounts, etc, but the fact remains that the properties still are titled in my name. I am considering doing the trust route.
Good luck and happy investing!
Great posts. In response to "holding first meeting". Take a look at page 85 "Own Your Own Corporation" by Garrett Sutton. Recommend that you observe the formalities and have a paper trail. It further clarifies that you & corporation are separate entities.
For those considering a LLC - suggest " Nolo's Quick LLC". Good Lucl
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 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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