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Real Estate Is A Business!

Real Estate Is A Business!. Treat it like one!. Choosing Your Corporation. Types of corporations Sole proprietorship General Partnership C corporation S corporation LLC limited liability company LLP limited liability partnership. Choosing Y our Corporation. Entities Not Recommended

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Real Estate Is A Business!

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  1. Real Estate Is A Business! Treat it like one!

  2. Choosing Your Corporation • Types of corporations • Sole proprietorship • General Partnership • C corporation • S corporation • LLC limited liability company • LLP limited liability partnership

  3. Choosing Your Corporation • Entities Not Recommended • Sole proprietorship: No protection, if sued you will lose both your business and personal assets. If you never choose a corporate entity you by default become a sole proprietor. • General partnership: Much like the sole proprietor you have no protection from your personal assets being attacked and with the extra benefit of being responsible for your partners actions. When things go south you are at the mercy of state law to decide how things are handled, there is not a written partnership agreement to fall back on.

  4. Choosing Your Corporation • C corporation: Offers asset protection and protects your personal assets from being attacked. The main drawback is that your earnings are taxed twice. When the corporation makes a profit it is taxed and when dividends are paid it is taxed again. As such, you are taxed twice on the same dollar of income.

  5. Choosing Your Corporation • S corporation: The advantage here is the flow-through taxation meaning you’re only taxed once. When the corporation make a profit it flows through to the shareholder’s personal tax return. This is a great entity for your property management company if you choose to start one but don’t put your properties here. If your management company get sued you don’t want your properties at risk.

  6. Choosing Your Corporation • LLC limited liability company: • Allows for flow-through taxation and superior asset protection. • Provides limited liability to the owner’s (known as members). • LLC’s allow for flexible management, either members or managers can run the company. • Members can utilize special allocations, for example profits in an LLC owned 50/50 can be allocated on a 70/30 basis.

  7. Choosing Your Corporation • To avoid personal liability in an LLC you must: • Maintain time filings with the state • Prepare entity tax returns • Maintain a separate bank account for the business • Separate personal and business matters • Have adequate capitalization (funds) of the business • Hold annual meetings for managers and members LLC’s are the best way to hold real estate!

  8. Choosing Your Corporation • LP limited partnership: • Much like a general partnership but offers more protection • Must have a general partner (risk) and a limited partner (protected to the extent of their contribution) • To avoid risk as general partner you can use an LLC as the general partner but this forces you to create two entities

  9. Protect Your Corporate Veil • Your corporate veil is the shield that protects your personal assets from creditor attacks • The better you follow the laws the stronger your veil • Separate you from your entity, do not comingle! • A recent study found that piercing the veil was successful 48% of the time. Don’t let it be you! • If you do not follow the rules you might as well not have spent the money to set it up in the first place • DO NOT use an “online service” or “do it yourself” to set up your LLC!

  10. Protect Your Corporate Veil • You need the correct language in your operating agreement that your attorney will customize for you • Pay your attorney or pay the law suit! This is not an area to save a few bucks. • Consult your attorney and tax professional so that you are properly protected • If you can’t afford to set up the entity properly then it’s not a good enough deal. If the deal is structured properly then the costs will come back to you if the form of profits.

  11. LRA Investment Group • I hope this slide show has given you some basic insights on treating your real estate as a business. • There is no substitute for proper research and due diligence, do it well and success will be yours. • Provided by the LRA Investment Group! • We are not legal advisors, it is your responsibility to seek professional counsel in all of your endeavors.

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