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Further
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Triple Your Business In Three Ways - John Jantsch
There really are only 3 marketing functions...once you master them, the rest of the game is pretty simple. Every small business owner wants more business. So what do they do. They focus all of their marketing attention one thing - advertising,...
How To Receive Thousands Of Dollars Worth Of Tools and Resources At No Cost - Stuart Reid
In the world of Internet Marketing many of the top opportunities offer free trials to their programs. They are normally for a months duration, but sometimes you'll get a 14-Day or even 10-Day trial. Trials, by necessity, only occur with...
Arrgh. . .Those Stupid Internet Marketing Cliches Are True! - Isaiah Hull
If you have read any internet marketing resource ever created, you have no doubt seen simple, one sentence, pot-shot solutions to all of your problems: You will only be successful if you think you are successful. You will make money if you work...
Lifetime Training - Arthur Cooper
Lifetime Training By Arthur Cooper (c) Copyright 2005 Most companies agree on the need to keep up to date. Most companies agree on the need for an efficient workforce. Most companies agree on the need to train their staff. So why don’t most...
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How to Choose the Proper Entity for Your Business
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Written By:
Tim Randle
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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 www.realestatetaxlaw.com 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 - continued below ...
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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.
Sincerely,
Tim Randle
http://www.TexasRealEstateClub.com
mailto:Info@TexasRealEstateClub.com
(c) Copyright 2003, All Rights Reserved.
Tim Randle is a full time real estate investor in Round Rock, Texas and can be reached through his web site at www.TexasRealEstateClub.com.
info@texasrealestateclub.com
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| _Additional Resources ... |
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The Almighty Buck - Sue and Chuck DeFiore
The almighty buck can actually be detrimental to your business. Think about it, if all you think about is how much you can make, are you really focusing on the other aspects of running a business. For example quality control, safety of your product,...
Bad Credit Auto Loan - Your best options? - Bill Smith
Bad Credit Auto Loan - Your best options? A bad credit auto loan isn't impossible to find-- it just takes a little work! If your credit is a little dented and dinged, it doesn't have to shut you out of an auto loan. There are those companies...
My Favorite Home Business Marketing Ideas - Tom Worsley
If you’re planning to make money online with a work from home opportunity then you need places to advertise. Fortunately there are literally thousands of places for you to advertise your business and or products online. Both FREE and FEE based...
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