I’m looking to create an LLC and am looking to purchase rentals on my own. However, I’ve been HEAVILY advised against setting up a single-member LLC b/c of the tax disadvantages (i.e. I’ll be taxes like a sole proprietor) and b/c of the lack of charging order protection. But…I don’t have anyone that I want going into these deals with me. My question then is…is it possible to give someone 1 or 2% ownership and if so, is it advisable to do that and basically have to owe someone 2% of my company and all its proceeds, when basically, they didn’t contribute any funds at all just so I can get better tax advantages and stronger asset protection? I’d really appreciate any insight. Thanks!
it’s not a tax problem.
First, you can tax a single-member LLC as a corporation or S-corp.
Second, disregarded (sole proprietor) may, in fact, be a beneficial tax strategy depending on your circumstances.
Third, I forgot.
Think carefully before bringing in another member. If things go bad it’s often difficult and nasty to break things apart. Business and friends are usually mutually exclusive.
You don’t receive any tax advantages from having a multi-member LLC.
In addition to the good comments from Mark, I will add that you can go into business with a trust for the benefit of your children.
BLL,
I am thinking make my son a partner of my new LLC. I am wondering will a trust better than partnership for money wise? He is one year old now. :biggrin
Thanks
If your son is a member, he gets membership rights. That means he can look at the books, has a say in investments and the way the LLC is managed, and has to a K-1 for his share of the profit. A properly structured trust for his benefit give him no control, provides for his futures, and protects his investment.
Hi,
to set up a company and do a trust, do I need different lawyer or some kind of lawyer can do it all?
thanks
The do it all lawyer is worthless. He won’t have the specialized skills to do what you need. You will need a team of lawyers, CPAs, and financial planners to determine the best way to meet your needs. You can either pay now to have done it right or pay later trying to undo all the screw ups.
So, the best way for a beginner is to join the local REIA and find such a team by refers, right :biggrin
Not really. Just about all of them provide cookie cutter agreements to people who don’t want to pay what it really costs to do it right. If you have a net worth of a few hundred thousand, fifty grand is a lot of money. At 10 million, 50K isn’t such a big deal.
You can get some basic work done from the REIA contact now and then build on it later as your net worth increases and you can retain better counsel.
The single member LLC is a great asset protection vehicle for the sole owner,
but in order to ensure that you are really protected, you must adopt a single
member LLC operating agreement and make sure you have one suitable for your business.
Obviously, you have never heard of Ashley Albright. Her single member LLC was liquidated to pay her debts. That doesn’t sound like great asset protection to me.
Think carefully before bringing in another member. If things go bad it’s often difficult and nasty to break things apart. Business and friends are usually mutually exclusive.
I’m no CPA, so let them verify my answer, but if you want tax advantages and asset protection without a partner, you want an S-corp.
An S-corp offers pass-through taxation like a partnership or LLC, but the benefit is that you can make yourself an employee of the corp., pay yourself a nominal salary (my acct pays herself $24,000 per year), and take the rest of your profits as draws or capital gains. With that arrangement, you only pay employment taxes on the salary.
A single-member LLC is a disregarded entity by the IRS, so employing yourself in your LLC wouldn’t help. I’m not sure if a 2-member LLC can escape employment taxes like an S-corp or not.
How do you protect against the lack of charging order protection with an s-corp?
Are charging orders a really huge problem for brand new real estate investors?
If it’s that much of a concern, you could form an LP for 5x as much money and a lot more administration. That gives you charging order protection.
But I don’t have any idea about the self-employment tax issue with LPs.
I would think saving taxes would be a much more important issues that charging order protection for most RE investors.
Brand new investors only have their business and a charging order will protect it much better than an s-corp, whose shares can be given to a creditor who can then liquidate the company and satisfy the judgment. At least with a COPE, there is a chance the creditor can’t liquidate the company.
I understand that, but in practical terms, what is going to help the new investor more, spending a lot more money to protect against an extremely unlikely event, or saving a bunch of money on taxes, which are an absolute certainty?
I agree. Taxes destroy more wealth than lawsuits, but the LLC can be taxed as an s-corp.
Can anyone tell me if I have this right? I went to see an attorney and I’m still confused by all of this:
These are the three options with an LLC, as an owner-manager, as I understand it:
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owner manage in a single member LLC, and risk being sued as an individual anyway
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create a multi-member LLC, bringing another person that I don’t even want involved in this into this business (and it would probably make them uncomfortable to be put on the spot and asked about this–I know I would be if someone asked me to do this unless I was married to them) and assign them a 2% interest in the LLC. What if there’s a problem or dispute with this person later on, if I can even find someone willing to go along with this?
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some expensive arrangement where a trust holds a percentage interest in the LLC?
All three options sound bad to me.
I usually have a trust hold the membership interests.
I only recommend option 1 where the single member is an entity.
I agree with your reservations on option 2.