The Real Estate Business

The 2-hour VIDEO of a live class explores the business side of being in real estate. It covers from the different ways of making money in real estate and their taxation to their corporate structure to payroll to marketing and branding. This is “must-see” video for anyone thinking about getting into real estate investment.

PART 1

PART 2

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The Corporation

Corporations are business entities originally designed to separate the owners from the actual business. The benefit was that any liability incurred from running the business stayed with the business. This protected the owners’ personal assets from creditors or lawsuits. Corporations, however, are subject to two layers of taxes. The first is a corporate tax based on profits of the corporation. The corporation pays these taxes. Then, the corporation gives “distributions” (share of profits) to the shareholders who are the owners of the corporation. The shareholder than reports this as income on their individual tax returns and that money is taxed again as personal tax. The shareholder pays this tax. This kind of corporation is generally called a C Corporation, and IBM and General Electric fall under this category.

There are many benefits and reasons why business owners would set up a C Corporation. However, it’s not the best kind of business entity for most small, closely held businesses. This is due to the fact that for most small businesses, almost all corporate profits come out as personal income to the few owners and they would be taxed twice. And currently, most of the other benefits of a corporation are available to other business structures. We rarely set up corporations for our clients. But, there are a few occasion. We go over these occasions with our clients if need be.

Business owners can avoid the “double taxation” on a corporation by doing an “S-Election” on the company. This makes the corporation a “pass-through” entity and eliminates the corporate taxes. All taxes are paid by the owners of the company. You also do this “S-Election” on LLCs.

The corporate structure was also the standard business entity for setting up non-profit companies. But lately, many non-profits are actually LLCs.

  • Learn More About Non-Profit Companies Here!

ALL CORPORATIONS REQUIRE NUMEROUS DOCUMENTS IN ORDER TO BE VALIDLY RUN AND MAINTAIN THEIR LIABILITY PROTECTION. SIMPLY FILING ARTICLES OF INCORPORATION WITH THE STATE DOES NOT PROVIDE ALL THESE DOCUMENTS. PLEASE CONSULT WITH OUR OFFICE BEFORE FILING ARTICLES.

 

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THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY BEFORE FORMING ANY BUSINESS ENTITY.

Business Structures

When beginning a business endeavor, the first decision that must be made is what type of business structure is the best suited for your purposes. This is not always an easy question to answer. This post discusses some common forms that small business owners choose. You should always discuss the options with an attorney.

The SOLE PROPRIETORSHIP  is the oldest business form around because it has existed long before we even had laws. You’re a sole proprietor is you engage in a business. That’s it. If you give piano lessons to the neighborhood kids or sell lemonade on the sidewalk, you’re a sole proprietor.

There is no business entity involved with a sole proprietorship. No forms to fill out or file. No meetings. You establish it simply by engaging in that business. Thus, if you open a store front and sell vegetables or create a website and sell imprinted T-shirts, you are a sole proprietor of that business. It’s quick and easy.

Unfortunately, the quick and easy part leads to some other ramifications. In a sole proprietorship, YOU are the BUSINESS. There is no separation of personal and business liability. If something goes wrong with running your business, like bankruptcy or lawsuits, you will be personally liable. That means a creditor can go after your personal assets to settle the debt, or a court can attach your personal assets to pay a damage.

There can also be tax and other benefits by forming a business entity that are not available to sole proprietors.

However, that doesn’t mean everyone should form a company of some kind. It all depends on your personal situation, the business you’re in, the amount of money you are making and where your liability comes from.

We are always here to help answer your questions. Please Us a Message if you want to know more about the risks of being a sole proprietor or if you want to form a business entity.

The LIMITED LIABILITY COMPANY (or LLC) is the most common entity formed by small business owners. It provides the flexibility of a partnership and the liability protection of a corporation.

The SERIES LIMITED LIABILITY COMPANY is a newer variation of LLC, it is often beneficial for real estate investors with many properties. These allow a separation of liability among assets under one company umbrella. It mimics the “holding company” and “sub-company” structure, but without needing to file certificates of organization with the state for the sub-companies. This saves time and money by getting a layered asset protection structure without a bunch of entities. In a Series LLC, the “subs” are called “series.”

The IRA, LLC is a VERY specialized LLC that allows a retirement account to become a member (owner). This LLC is used in “Self-Direction,” which is a vehicle to use retirement account money (like IRAs) in real estate investment.

  • Learn More About the IRA, LLC Here!
  • Learn More About Self-Direction Here!

The CORPORATION is the traditional form, corporations come with additional benefits but with additional complexities. With lower overall taxes, however, more and more businesses are turning back to a corporate structure.

S-Corporations & S-LLCs:

Non-Profit Corporations & LLCs:

Partnerships: Highly flexible, partnerships don’t usually come with any liability protection. You can be deemed to be in a partnership even without putting it in writing.

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Partnerships

There are three basic forms of partnerships: A general partnership, a limited partnership and a joint venture. But first, partnerships generally are contractual arrangements among two or more people with the purpose of engaging in some business venture. They are not business entities! They are contracts. And as such, a different set up laws applies.

General Partnership: This is a situation where all partners are treated the same for liability purposes. Because it is a contractual arrangement, there is NO liability protection and all partners are generally considered jointly and severally liable for debts and obligations of the partnership. That is they are liable as a group and as an individual for the whole amount.

Limited Partnership: In a limited partnership, there is a distinction among the partners. Some are limited partners and some are general partners. The difference is that the limited partners are NOT liable for the debts and obligations of the partnership. The general partner, however, is liable. There must be at least one general partner in the limited partnership.

Joint Venture: A joint venture works differently than a partnership. See more discussion on the Joint Ventures page.

AS LIABILITY ISSUES DIFFER, PLEASE CONSULT AN ATTORNEY BEFORE PROCEEDING TO ESTABLISH A PARTNERSHIP OR JOINT VENTURE.

 

THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. PLEASE CONSULT AN ATTORNEY AND TAX ACCOUNTANT BEFORE FORMING ANY BUSINESS RELATIONSHIP.

Business Entities

The Limited Liability Company

Limited Liability Companies (LLCs) are a newer form of business entity than corporations. They were designed to provide an easier and simpler business form for small business owners. Small businesses are usually defined by a small number of owners and not by the amount of profits. LLCs are designed to provide liability protection for the owners and avoid the double taxation that corporations face.

LLCs are the preferred business entity for most smallbusiness owners. They also provide a greater flexibility when defining the managerial and financial arrangements among the owners than corporations do. However, while generally simpler than corporations to form, because of this flexibility they can quickly become much more complicated depending on the needs of the owners.

LLCs also provide the ability to have different classes of owners which can be advantageous if owners are receiving different preferences when profits are allocated. While most small business owners will keep it simple, that’s not always the best way to proceed. We are always willing to discuss the best way for you to proceed.

This flexibility comes from the fact that LLCs are like “partnerships” in how they are run and like “corporations” in how they provide liability protection. The most important document in an LLC is the Operating Agreement. This is like a partnership agreement and defines the relationship regarding both the management structure and the financial arrangement among the owners. This document is paramount to legitimatize your business if ever challenged in court. And you must run your company according to its terms.

LLCs are taxed like partnerships. This means that the profits come out of the LLC and are then claimed on each owner’s personal tax return as salary income. If there is more than one member, you must issue K-1 statements to all the owners that define how much of the gain or loss is attributable to each owner. Further, all the profits are subject to a Self-Employment tax (for an explanation, see Taxes). This tax can be minimized by filing a form with the IRS stating that the LLC wants to be taxed under Subchapter S of the tax code (for an explanation, see S-Corporations & LLCs).

ALL LLCS REQUIRE NUMEROUS DOCUMENTS IN ORDER TO BE VALIDLY RUN AND MAINTAIN THEIR LIABILITY PROTECTION. SIMPLY FILING ARTICLES OF FORMATION WITH THE STATE DOES NOT PROVIDE ALL THESE DOCUMENTS. PLEASE CONSULT WITH OUR OFFICE BEFORE FILING ARTICLES.

Setup your Entity or Partnership Today

 

THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY BEFORE FORMING ANY BUSINESS ENTITY.

The Series LLC

A SERIES Limited Liability Company (Series LLC) is a much newer form of business entity than even LLCs in general. They were designed to provide an easier and simpler business entity primarily for real estate owners (and other asset holders) who had multiple properties that were formerly held in separate LLCs. They are the same as a Limited Liability Company but with the ability to create a number of SERIES, or Sub LLCs, within the one main LLC structure.

Each Series, then, has a separate and distinct liability. This means, essentially, that each asset is in a separate company and not subject to the debts or judgments of another. This replaces having to have multiple companies.

Here’s a shorter video:

 

While a Series LLC can save you legal and accounting fees down the road, it does NOT save you bookkeeping time or expenses as each series must still maintain its own bank accounts, bookkeeping and corporate records.

Also, they may not be advisable when you want to have some assets owned by one set of people and other assets owned by other people. Further, while they are legally authorized entities, they are a newer form of entity and have not been fully vetted by state courts.

Here’s a longer video:

 

ALL LLCS REQUIRE NUMEROUS DOCUMENTS IN ORDER TO BE VALIDLY RUN AND MAINTAIN THEIR LIABILITY PROTECTION. SIMPLY FILING ARTICLES OF FORMATION WITH THE STATE DOES NOT PROVIDE ALL THESE DOCUMENTS. PLEASE CONSULT AN ATTORNEY BEFORE FILING ARTICLES.

Setup your Entity or Partnership Today

THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY BEFORE FORMING ANY BUSINESS ENTITY.

Creating LLCs

This short VIDEO covers the basics of setting up the different kinds of LLCs. You’ll learn the important considerations in choosing which type of LLC you’ll need, as well as the basic form of LLCs: members, managers, registered agents, etc. This is a great video if you are unfamiliar with limited liability companies.

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