Hi,
I’m looking to move from residential investing to commercial. Is it better to buy a commercial property with a corporation, an LLC or as individual?
How do I get my corporation to have credit history? How do I get it active? How does incorporating and investing in real estate come together? Isn’t there a huge tax upon distribution/sale of a property? Anything helps!
LLC for asset protection.
Corporate stock is considered an “investment”. As such it is subject to be awarded to satisfy a judgement. In the event you are personally sued, this would leave your adversary owning the stock of your corporation and therefore all of its assets.
Member interest in an LLC is considered personal property. As such is cannot be awarded to satisfy a judgement.
Both a corporation and an LLC protect you from the company’s liabilities, but only the LLC protects the company from your personal liabilities.
You can choose to have your LLC taxed as a corporation, but still retain its character an an LLC. This preserves your tax preferences while providing the greater asset protection.
You should NEVER own investment property as a sole proprietor. As such, any liability from the property would put your personal assets at risk.
How does it come together? You set up an LLC. The LLC buys property. There you go.
HUGE tax? Well, if you have HUGE gain, then I suppose that’s possible, but hey! That’s a GOOD problem. But there are options to defer/reduce that gain.
Hi Mark,
thank you for your answer! How does an LLC buy property if it has no credit history? How do you start a credit history for an LLC?
I’m looking for a CPA with REI backgroung-where are you located?
Thanks!
Look for a lender that will finance to the LLC with a personal guarantee. They are out there.
Dallas
any suggestions for the lenders?
Aurora Loan Services will let you transfer deed to LLC or Corp. I found that out recently after being told that they won’t do it, and it will trigger the DOSC. I got a call later on from the customer service and was then told that they made a mistake and will indeed let you transfer the deed but you have to guarantee it personally.
You may want to check them out…
Question about Corp. and LLC…
My spouse and I started buying real estate at the end of last year (2 residential prop.) They were meant for flipping, but we decided to keep them as rental instead and are currently being rented. We currently have a C-Corp right now but haven’t transferred the deeds to it. (we just found out one of our lenders will let us do it, but the other one won’t) 
I’ve been reading posts here about having rental properties placed in LLC’s instead of Corp. and I was a bit concern with the liability issues of placing our properties in a C-corp.
Should we just dissolve the C-Corp and create LLC and use that instead? Also do you guys recommend having an umbrella policy on top of the actual homeowners insurance policy besides having the properties under the LLC’s?
Thanks for your input…
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 members 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. The LLC will protect your personal assets but the property will remain partitionable and subject to liens and encumbrances. You would have to take title in the name of your LLC in a land trust for protection even the IRS cannot penetrate.
Da Wiz
There is a significant difference between a Corp and an LLC in terms of asset protection.
Corporate stock owned is considered an investment, whether it’s IBM or Bill’s Property Corp. As such, it is available to satisfy any judgement rendered against the investor/stockholder personally. In practice this means that when you rear-end someone in a Pinto and they sue you personally, they could be awarded your stock investments, gaining control of the company and selling or taking its assets.
An LLC, on the other hand, is considered personal property by the Texas LLC Act. As such it is NOT available to satisfy judgements against you personally.
Both the LLC and Corp will protect you from liabilities arising within the company. But only the LLC will protect the company from your personal liabilities.
This is why I always recommend the LLC form.
With regard to taxes: Since there is no tax law for “LLC”, the IRS requires you to choose whether you want corporate or individual taxation. So whether the IRS ‘looks through’ the entity to you personally for taxes is purely a business decision that you can make.
This does not affect the liability protection in any way; it is purely a tax matter. therefore you can choose whatever tax strategy makes the most sense for your situation: sole proprietor, partnership, C-corp or S-corp.
In your case, for an extra $500 (give or take) you can dissolve the corp, set up an LLC, have the superior liability protection, avoid the paperwork hassles of a corp and still have whatever tax benefits you choose.
Da Wiz and Mark Wagner,
Thanks for your inputs. Your great advice is highly appreciated. I wish I had known this site before setting up a corp after being convinced by another “CPA” that corp is the “way to go”. Live and learn I guess. I’m totally convinced now to dissolve our corp. I have looked at WA. state Dept. of revenue and it listed no fee for dissolution. Are there any other fees that I should be looking for besides this.
Where do I find out about the fee to transfer the titles to a land trust. Is it through a title company, courthouse? I have no clue, can you tell ??? I’ve read somewhere here that it could be around 2%. Ouch :bash: Is the % based on the current value of the property.
Da Wiz, do you know of someone or any non-profit corp in WA that we can use as our trustee. Can I use someone out of state? Looking forward for your reply … Thanks again
Land trust costs vary. For a simple trust for your own home, it runs $468 which includes your trustee fee ($144) for a year.
For an equity holding trust with more than one beneficiary, the cost is 1% of the Mutually Agreed Value, plus $500 ($200 for accounting review; $300 for legal review). These charges are from the realty services company that prepares the documents.
The trustee charge (a totally separate and unrelated non-profit corp) is a $500 setup fee, and $39 per month. Total is usually around $2000, which my tenant always pays.
Some people will tell you that you can pick up land trust papers for $12. You probably can, but if you want proper asset protection with all of your documents reviewed by knowledgeable attorneys so that you can feel certain you are fully protected, you get what you pay for. There are many other documents that need to be gathered and added, of which none of these are required in a Simple Trust…
- Copy of the Deed of Trust
- Copy of the Note/s (1st & 2nd)
- Copy of Monthly Statements for Loan/s (1st & 2nd)
- Copy of the Hazard Policy
- Copy of the Property Tax Notice
- Conversion of Hazard Policy to a Landlord Policy
- Change of Address Forms for Taxes and Insurance
- Notice of Uninsured Deed
- Assignment of Beneficial Interest
- Beneficiary Agreement
- Net Sheet and Crossfoot Report
- Fee Disclosure Agreement
- Any Riders that may be required
- and then you can add the Net Lease and Occupancy Agreement.
To answer your other question, the trustee I use offers his services nationally. Best of luck to you.
Da Wiz
I just wanted to check that WA was the same with regard to treatment of LLC interest as personal property. It is.
RCW 25.15.245
Nature of limited liability company interest — Certificate of interest.
(1) A limited liability company interest is personal property. A member has no interest in specific limited liability company property.
i set up a corp. in ohio and now it looks like i need to set up an LLC.
i have to pay to have that dissolved or can i use it for something else? my wife is gonna kill on all this money i’m putting out…does anybody have a piece floor i can sleep on? :-\
I can rent you my property in TX:)
Hey, don’t misunderstand me here. A corp is 1000% better than owning in your own name. It’s just not as good as the LLC.
One should NEVER own investment property personally; it’s like having a target on your back.
If a corp is what you’ve got, then go with it. If it’s worth $500 to you to have that extra protection, then change.
It’s all a cost/benefit calculation.
Da Wiz,
Thanks a bunch for the land trust info. That really helps… You’re right though, you will need pro to set this thing up, so I’m going to look into this in the next few days.
general liability insurance is a must. it should be considered the “first line of defense”.