|Real Estate Information|
How to Choose the Proper Entity for Your Business
First, let me state that I'm not an attorney and the rest of this article is just based on my experiences so I'd advise you to contact John Hyre at realestatetaxlaw.tk to get some solid, specific advice on your particular situation.
Also, this article is not going to discuss land trusts, which some of you may have just stumbled upon. A land trust is not an entity. Although it is frequently used in conjunction with entities, it is merely a paper device used to shield property ownership from the public.
When I first got going, the recurring wisdom was that an investor should use a C corp for cash deals. By cash deals, I mean anything that throws off cash quickly. It might be a wholesale flip, retail assignment, rehab and retail, option, etc.
There were numerous reasons why this was and is recommended. First, the C corp offers great liability protection and allows the owner to take advantage of fringe benefits, thus draining the corp of excess profits through legitimate expenses.
What I've learned the hard way is that this entity is not necessarily better for cash deals than other entities unless you're doing serious cash numbers. By this I mean that the added benefits that a C corp offers are not available to you without a ton of cash coming in.
Stop and think about it for a moment. Are you going to generate enough cash to pay normal operating expenses like salary, marketing, funding, overhead, etc. and still have cash remaining to set up company programs for retirement, medical, insurance, education, etc.?
Typically, the answer's going to be "No", at least during the formative years. The primary downside to a C corp is that any losses, paper or otherwise, do not flow through to your personal tax return. You don't get to use them anytime soon.
When I started, the secondary recommendation for cash deals was an S corp because it did offer many of the same benefits as a C corp, yet allowed the owner to flow losses through to the personal tax return. Once the business was thriving then converting to a C corp was not difficult.
When I went through this research again about a year ago, the majority of responses I received was that I should use a Limited Partnership (LP) for cash deals with a Limited Liability Company (LLC) as the General Partner (GP). I've also heard others suggest using an S corp as the GP. Other recommendations included using an LLC by itself as the cash deal entity.
What about entities for the keepers? By that I mean any property that hangs around for a while and doesn't cash out soon. It could be a rental, lease option, or any property with owner financing, including subject to (Sub2). What I was told there was the same; that an LP with an LLC as the GP was currently best.
The point here is that if you do spend the necessary time to research this issue (and you should), you are likely to get each of these responses and possibly more.
My experience is that any of these suggested entities is better than starting with a C corp as I did. Factors that should play into your decision process include setup costs and any state-specific laws for each of the entities. For example, in my state, Texas, the LLC is much cheaper to set up than an LP. However, the LLC is also subject to franchise taxes on gross receipts over 150k and the LP is not.
Confused? I agree it's not easy to know what the right course of action is. Do you need an entity or multiple entities established before you do some deals? Absolutely not. Why go to the trouble of setting up companies for a business that you may decide to discontinue? How do you know if you'll even like real estate investing until after you've done some deals? Why do you need to set up serious asset protection until you have something worth protecting?
My recommendation would be to begin to research the various entities for your state as you continue to work your investing business. In my opinion there's no need to make things complicated in the initial stages. If there's no obvious negatives to an LLC in your state, then perhaps that would be a good start.
I would not rush out and set up a separate entity for cash deals and a separate entity for keepers as I did. I would not set up an LP as my first entity as it involves at least two partners, one limited partner and one general partner. Entities are not set in stone. With the proper guidance and counsel from good attorneys and CPA's, you can make changes to your business plans as the business grows.
Again, this is not something you have to figure out when just starting. Find someone very knowledgeable about real estate investing, like John Hyre mentioned above, and begin to ask the tough questions so you can make informed decisions. As your business grows, your asset protection can grow with it.
Thanks for reading. Until next time, good investing.
(c) Copyright 2003, All Rights Reserved.
About The Author
Burn, Baby, Burn!
Luxury homes are lots of fun to inspect. Sure, the pay is better too, but mostly it's just fun to see how the other half lives! I also get to meet those people who have reached such a level of financial success that they are buying a home that seems like it could have been a boarding school!One of the fun aspects of inspecting large and expensive homes is seeing furnishing and interior design work at the highest level.
Flat Fee MLS Listings - Is This The Future Of Real Estate
Realtors are all a buzz about this new form of listing houses on the MLS (multiple listing service). Some feel it creates more work for the buyers agent, while others see this as a way to tap into the For Sale By Owner market.
For Sale By Owner Listings
Selling your home on your own, without a Realtor, is becoming less and less popular. This is surprising, considering that home values have skyrocketed and commissions have risen along with them.
How to Negotiate a Successful Short Sale
Anyone who has ever profited from doing a short sale has also without a doubt had one or two rejected at some point. Guess what? It is just the nature of the beast?As with all types of sales; you're playing a numbers game.
Flipping Houses for Gold: Three Tips to Help You Find the Perfect Fixer
Many real estate investors enjoy "flipping houses," or buying and selling houses quickly for profit. Not all flips are fixers.
Rehab Foreclosed Houses the Right Way and Keep All the Profits!
I've been teaching people how to buy foreclosure properties for a long time.And we all make the biggest profits on the deals that we rehab the right way.
Hurricane Katrina And The Impact On Real Estate Prices
In the wake of Hurricane Katrina's wide path of destruction, the real estate market will be affected perhaps in ways not fully understood or expected. If recent hurricane recovery history holds true there will be several good things to come out of all destruction.
Advantages and Disadvantages to Selling a House on Your Own
As with any business transaction, there are pros and cons to selling your own home. Many people are intimidated by the whole process, but if you know what you are up against, and if you are aware of what needs to be done, you will be more effective at selling on your own, or you will be better at making sure your agent does what you prefer.
Fixing Houses for Resale: Three Beginning Steps to Increase Profits and Have Fun
Real estate investors specializing in fixers make higher profits when they have a detailed work plan and know how to get around the future resale appraisal issues.Before you begin your fixer makeover, taking a few extra steps helps you make more money, avoid future appraisal pitfalls, and have more fun.
Housing Bubbles and You
Are we in a housing bubble? To answer that question first we need to understand what a housing bubble actually is. A housing bubble is what happens when the there is a significant rise in the market that is mostly due to the expectation that the prices will continue to rise.
Find the Right Apartment Quickly and Easily Using an Apartment Locator Service
You've probably seen the ads or heard about apartment locators. But what do they really do and why should you choose an apartment locator to help you find an apartment area?One of the biggest reasons to use an apartment locator is the fact that there are hundreds of apartments to choose from.
How to Sell Your Home Without a Real Estate Agent
Considering the rapid rise in home prices over the past several years, home sellers are taking a hard look at the commission they have to pay to a real estate brokerage to market and sell their home. Real estate commissions vary across the country; they average in the four to seven percent range.
How to Own a Dream Home in Spain
Every year hundreds of thousands of foreign visitors travel to Spain to delight in the fantastic weather, stunning natural landscapes, excellent entertainment options and superb Mediterranean beaches. Many of these people dream of one day owning their own property in Spain, in fact Spain is now one of the most desirable second home and retirement destinations in the world.
How to Buy a Property in Bulgaria
The CostAlthough the property prices in Bulgaria are quite low compared to the other European countries, there is still a wide variety of prices depending on the property type and location (as a rule the properties in Sofia and at the Black Sea are more expensive). The first thing you will need to figure out is how much you can afford to spend and thereafter to determine the price range for your purchase.
Condo-Hotels - A New Second-Home Alternative to Time Shares
Condo-hotels have evolved as a better, more reliable second home alternative to time-shares. They are usually attractive, high-rise hotels on the ocean or in other prime locations, and range in price from the mid $200,000s to over 1 million, depending on the size, location, and amenities.
Build Your Retirement By Investing In Real Estate
Most people buy one or two properties. One is their primary residence and sometimes they have a vacation home.
U.S. Real Estate Sought By Foreign Investors Due to a Weaker Dollar
The weak US dollar has been good news for real estate. Taking advantage of the favorable conversion rates, foreign investors are eagerly picking up real estate in major cities across the US.
The 21st Century Way To Build Equity
Here to stay and firmly established in the U.S.
How To Best Negotiate A House Deal
Whether it's selling your home or buying a home, more often than not you'll come across a stage where you'd have to negotiate. Negotiation is the art of getting what you want at your terms and conditions.
Rehab Your Way to Wealth: The Quick Way to Fixer-Upper Success
Completely rebuilding a house is not necessary to make money in investment real estate. Most times, if you have bought smart, you won't have to make a huge improvements on your investment property.
|home | site map|