i have a investment group for the purpose of getting into real estate…would i benefit more from a LLC or Corp and how?also which one would i be able to take out a bank loan in my investment groups name and have my investment group be liable instead of the members within the investment?
Based on the second question, you have to use a c-corp.
So I can’t do the second question with a LLC?
You could use an LLC, but you’ll spend a great deal of money on drafting an operating agreement to do what you want. The LLC wold be cost prohibitive.
is the cost the only difference between the two?
Not even close. They have different tax and liability treatment. They have different reporting requirements.
well i know based on the second question that a corporation fits the situation better, but how about the first question pertaining to using the investment group for real estate…how does a corporation benefit that?
Both would be the same. It’s more a question of distributing profits. Will the group pay taxes on its profit and then the shareholders will pay taxes on dividends? Will the group members pay taxes on their individual returns?
I prefer pass through taxation when the investment generates a loss because that offsets other income. I prefer a corporation when the investments generate profit. I like to use the profit to fund benefits programs that are tax deductible to the corporation and tax free to the individual.
is there a certain amount of money i should have before even considering starting either of these?
If you are taking on partners, you don’t have a choice. Either you set up something properly or use the state’s default rules. Otherwise, planning is not cost effective until you reach the $5-10 million mark.
I am not sure why BLL suggested an C corp. A “C” corp is generally regarded as a horrible way to hold real estate. Perhaps he can explain.
LLCs are much more common for what you want to do today. An LLC is a more flexible structure, in regard to putting assets into the entity, taking them out and splitting of profits.
An S corp is an option and better that a C corp. An S corp is more like an LLC but there are some small differences.
I don’t think most lenders would care whether you are an LLC or a corp as far as loaning you money. An LLC operating agreement is important but I would not call it cost prohibitive. A Corp should have by laws and a document that controls how the corp is run so I don’t see a cost advantage here. A Corp. has more formalities that have to be followed.
The cost to create an LLC or corp? Prices are all over the board but for good advice expect to pay $1-2K or more.
Now an important issue is will your “Partners” be active in the business or passive. If they are not active in the business you could be creating security and you need to comply with SEC regulations. Doing a private placement could cast you $15k Plus.
Nolo Press has some very good book on LLCs and other entities. It’s worth reading them so you understand the issues involved.
Generally regarded by whom? The gurus who peddle junk? The mostly inaccurate information available on the Internet? The OP said he wanted a structure where the owners are not liable for the entity’s debt. That is a c-corp.
A c corp is preferable to an LLC in situations when pass through taxation isn’t wanted or needed or large profits can be used to create tax deductible employee benefits.
An s-corp is nothing like an LLC. The only thing they have in common is pass through taxation. It is closer to a c-corp than an LLC and an s-corp is not an option due the OP’s need to isolate investors from loan obligations.
The cookie cutter junk that most people use won’t work for the OP. He will need to pay at least $200+/hour for an attorney to draft the operating agreement the way he needs and is looking at close to 20 hours of billable time to get the job done correctly. I consider $4K too much for a venture with only a few thousand dollars.
That price only gets you competent advice. Good advice from true experts with more than general understanding of the issues will cost 15-20K for a simple plan. The people who cater to the small investor aren’t the best in the field. The best deal with high net worth individuals in the 10M - 100M+ range who don’t balk at spending $50K for comprehensive work. They average investor can’t justify spending that much to protect the typical portfolio.
I talked to a accountant and attorney today and they both said a s-Corp or LLC would do fine for what I’m trying to do…my question is the attorney is going to charge me 2500 for the LLC and 2000 for the s-Corp so am I being over charged and would it b a bad idea to save 500$ and go with the s-Corp? What’s the difference between the two?