I was wondering which is better as far as being a real estate investor, to have your company incorporated or to form an LLC. Any information on tax advantages and liability protection would be great! Thanks for the help!
An LLC will protect your personal assets, but your property will remain subject to liens and encumbrances. A land trust will protect your property and shield you from creditors, judgments, etc. I place the property in trust and take title in the trust with my LLC. Kills two birds with one stone.
Da Wiz
Thanks again "wiz’’ for the response. What if i was incorporated, i could still place the properties in a trust, and wouldn’t that give me even more protection for my company?
GREI,
The LLC provides the protection of a corporation, but is more like a partnership arrangement in many ways. LLC "members” (versus ‘share-holders’ or ‘partners’) participate in the day-to-day management of the company without incurring personal liability. All taxing agencies (state and federal) tend to “look through” the LLC to its member’s as the responsible parties in terms of accounting for, and payment of, income tax. Profits and losses relative to passive activities within the company flow to the members who remain free of individual self-employment tax.
Da Wiz
Thanks again that helps me out a lot!
I have some time to kill so here goes. I’m always advocating the use of a non-profit corporation as a Trustee. Here is why:
When creating a simple single beneficiary land trust for just the purpose of shielding ownership from public view, one can legally name just about any one or any entity he/she would choose to function as a trustee. However, when more than one beneficiary (i.e., a trust involving other parties with disparate interests and objectives) is involved, there are severe drawbacks to using any entity other than a third-party, non-profit, corporate trustee.
USING A FRIEND OR RELATIVE AS TRUSTEE
Risky and quite probable failure to honor privacy and anonymity, especially under threat of legal action.
An individual trustee’s failure to charge a fee would not support the land trust’s validity in court. The attempt to charge a fee would not be seen as adequate unless the party were a bonded entity.
An individual trustee’s death would embroil the property in his/her own bankruptcy, Probate and other personal legal actions.
An individual would most likely never be bondable as a trustee and would likely not have the resources to provide a completely separate, free and bonded collection and bill-paying service.
An individual would not be seen by the courts as a standard trustee, charging fees “commensurate with industry standards”: therefore severely impairing the integrity and structure of the land trust.
One’s own personal appointment would not be seen by a 2nd or 3rd co-beneficiary as a mutually trustworthy holding entity. Such likely bias obviously would not be in the best interests of any of the co-beneficiaries
ONE’S SELF AS TRUSTEE
Risky and quite probable failure to honor privacy and anonymity, especially under threat of legal action.
An individual trustee’s failure to charge a fee would not support the land trust’s validity in court. The attempt to charge a fee would not be seen as adequate unless the party were a bonded entity.
If a trustee is also a beneficiary, a merger of title is created (see Doctrine of Merger), invalidating the trust if challenged in court as being a bona fide land trust.
An individual would most likely never be bondable as a trustee and would likely not have the resources to provide a completely separate, free and bonded collection and bill-paying service.
An individual would not be seen by the courts as a standard trustee, charging fees “commensurate with industry standards”: therefore severely impairing the integrity and structure of the land trust.
One’s own personal appointment would not be seen by a 2nd or 3rd co-beneficiary as a mutually trustworthy holding entity. Such likely bias obviously would not be in the best interests of any of the co-beneficiaries.
USING ONE’S ATTORNEY AS TRUSTEE
Using one’s own attorney would perhaps not pose a problem as long as no other unrelated beneficiaries were involved who would have separate and independent interests and financial objectives within the arrangement.
An individual trustee’s failure to charge a fee would not support the land trust’s validity in court. The attempt to charge a fee would not be seen as adequate unless the party were a bonded entity.
An attorney or law firm would most likely not be bonded as a trustee for land trusts; though his/her malpractice insurance may suffice as protection against malfeasance and/or errors and omissions.
An attorney or law firm would likely not be recognized as a bona fide trust holding institution by any court that would be challenging the integrity and purpose of a a co-beneficiary land trust title transfer.
One’s own attorney would not create a mutually trusted, unbiased third-party “escrow” entity. A biased attorney (acting in primary favor of a client) could wreak havoc in a contest involving dissention between/among beneficiaries.
USING ONE’S OWN CORPORATION
Would create a merger of title, invalidating the trust, should it be challenged in court as not being a bona fide land trust (see N.C. A.G.O. vs Russell and Dianne Barberio 2005)
A privately or closely held corporation would not charge legitimate fees and therefore would not likely be seen by the courts as a bona fide holding company, whose business it is to hold titles in trusts and charge fees commensurate with industry standards.
One’s own corporation would not be seen by a co-beneficiary as a mutually trustworthy, and wholly unbiased third-party holding (“escrow”) entity. Such a bias would not be in the best interests of co-beneficiaries. As well, using one’s own business entity would create a merger of title invalidating the land trust model.
USING AN OUTSIDE CORPORATION AS TRUSTEE
In virtually all states, any corporation used as a holding company must be either: 1) one’s own corporation (see above), 2) a chartered depository trust institution (e.g., Bank and Trust, Title and Trust, etc.) or, 3) a non-profit, charitable corporation established solely for the purpose of holding titles to real estate in trust for the benefit of its members.
The Third Party Non-Profit Corporation
A professional non-profit entity specifically and solely engaged in the holding of titles in land trusts. Fully staffed by full-time knowledgeable professionals.
A reasonable trustee fee is charged, which is well in line with industry standards is charged, enabling the creation and funding of an un-paid 3rd-party collection & disbursement entity (a free bill paying service for the benefit of members).
Cannot die (re. Probate issues), and is well backed financially to allow for careful adherence to all laws. rules and regulations relative to reporting and maintenance of a consistently good standing with the state.
Fully bonded as a trustee for title holding, beneficiary directed, 3rd party trustee nominee title-holding land trusts.
Fully recognized as a bona fide holding institution by any court that would/might be challenging the integrity and structure of the land trust or holding to adherence to statute and or standards in states wherein land trusts per se are specifically legislated and authorized
Functions a fully unbiased and unassociated third-party title holder (“escrow-type)” holding entity.
Da Wiz
Without going the trust route, the LLC form is stronger for asset protection that a corporation.
Both the LLC and the Corp provide personal protection against liabilities that arise from within the entity. However, there is a significant difference when considering protecting the entity’s assets from your personal liabilities.
Corporate stock is considered an “investment” and as such is available to be used by the court to satisfy a judgement against you. In other word, if you personally rear-end someone in a Pinto, are sued, and lose, your adversary could end up with 100% of the stock in your corporation placing him in control of the corporation’s assets.
An LLC on the other hand, is considered personal property and as such is not available to satisfy a judgement.
So while both protect you from the LLC’s liabilities, only the LLC will protect your company from your personal liabilities.
mc,
You are exactly correct. The LLC is much more preferable to a corporation. It will provide great protection for your personal assets.
Da Wiz
MC
I totally agree with that. That is what I advise my clients. Another thing is that the IRS tries to “pierce the corporate veil” .
Dr. Wiz,
You said “place the property in trust and take title in the trust with my LLC. Kills two birds with one stone”
Does this mean I use the trust to buy the property and partner with LLC ? My trust doesnt have enough $ to fund the property. Is it advisable to borrow the loan under my name, then loan it to LLC. Then LLC partner with trust to buy property. Is this a good way to start from scratch ?