I’m looking into investing in properties in Texas. My intent is to buy them and sell them for profit (not lease them out long term). Which way is the best way to protect myself legally? It appears to me that a DBA doesn’t do it as well as other options. Which one is best? What about the fees involved? Do I need to seek an attorney, or is this something that I can figure out?
I am looking to do this as a single person, not as a partnership.
Thanks in advance!!!
Kevin
San Antonio
Howdy Kevin:
A DBA offers no asset protection or tax savings. I would do a LLC. It is a new structure between a partnership and a corp. You can form on line at Sec of State for $200 filing fee. There are requirements to pay attention to to keep the LLC status and asset and liability protection.
An investment trust is used by many folks too to help hide the true owners name from the public. The LLC is actually the beneficary of the trust.
You may want to buy insurance too in case someone falls and gets hurt at your property.
Ted,
Thanks so much for the quick response! Clearly a LLC is the way to go. As to setting up an investment trust, how is this done? Do you think this is necessary, or is this just a way to keep your “real” identity hidden?
In the progression of getting this “thing off the ground” setting up the LLC is the most logical first step, right? What would be next? I am reading (and re-reading) everything I can find reference the topic of real estate, and am still a little “intimidated and reluctant” to follow a clear course of action.
Any insight into this would be greatly appreciated! Again, thanks for the response!!!
Kevin
Asset protection involves entities like LLCs…as the LAST line of defense. The asset protection features of entities are grossly exaggerated by most “gurus”. Of greater importance: How you do business. Are you honest? Are your contracts well drafted (thorough yet understandable)? Do you know your duties under the law. By all means, use entities for asset protection & tax savings - but do not view them as a primary means of asset protection…they are only truly useful when all else fails.
For flips, one of three entities tends to be best for tax purposes: An S-Corporation, a C-Corporation or a Limited Partnership. Which one is best for you? Depends on your exact details. See an article that I’ve penned on the subject - it’s on this website. If I spent some time holding properties before I sold them, I might consider a land trust in addition to an entity, which can provide a degree of anonymity, especially on unleveraged properties.
John Hyre
Hi John -
Just thought I’d drop a line to say that it’s great to see you posting now and again. You’ve been busy, I expect. In fact, I can hardly believe that you had the time to post anything this close to Aug 15 – taking a break?
Missed you at the Austin party a couple of weeks ago; you could have shared your wit and wisdom with those “survivors” grouped on Ted’s porch. The last of us headed for bed around 4 am. You would have “fit right in” and there was plenty of room to light up your cigar!
Hope you’re doing well – we miss you down here in Texas.
Take care,
Eric C
Eric,
Always nice to hear from you! I am abolutely swamped…this qualifies as R&R! I’ll probably be doing more of it around 9/1. Also, I will be in Dallas @ 9th -12th of September and in San Antonio & Houston for about a week in late September/early October. We should seek steak and Shiner Bock together on at least one of those trips, yes? I’ll bring a book that you’d enjoy as well…payback, as it were!
John Hyre
Hey John -
Sounds good to me – as long as you let me do the buying!
Mid-Sept should be fine; I’ve got a trip to Atlanta for Ray’s little shindig around the first of the month as well as a trip to Sin City (Vegas) in the works for the end of October.
Other than that,…
I have a great steakhouse picked out and ready for your Big D arrival – complete with a smoking room- fireplace and all. Of course, a fireplace in Dallas in Sept is usually a bit like having a BBQ in hell, but this year the weather has been unusually nice. So nice, in fact, that it is scary.
Books! Always interested in books. Ray and I trade books all the time. And I have a few for you too. Of course, it may be best that we arrange to get them shipped to your digs there in the frozen north, … I mean, Ohio. You wouldn’t want to carry any more boxes through the TSA folks at DFW than absolutely necessary.
Take care,
Eric C
PS – sounds like you’ll be getting some playtime in before the last stragglers come through the door (Oct 15). Enjoy it!
Hello Newbie,
Your choice for real estate ownership in Texas is one of two entities: a Texas Limited Liability Company or a Texas Limited Partnership. The decision of one over the other mostly depends on franchise taxes. Limited Partnerships cost more to form and operate but are not subject to franchise taxes. LLC’s cost less to form and operate but may be subject to franchise taxes depending on the amount of income. There is no such thing as a Land Trust in Texas. I see them used frequently but I believe that is because they are misunderstood.
Charles E. Brown
P.S. Welcome to Texas
Charles,
In re no land trust in TX…are you saying that TX won’t permit a revocable trust that owns land? In essence, that’s what a land trust is.
Also to clarify for other newbies: CEB correctly states that the way to own RE in TX is via LP or LLC…“own” being synonomous with “hold”. If you are flipping, a corporation may be more appropriate, as you are not holding the RE for any real period of time.
John Hyre
Hi John,
Yes, you can have a revocable trust that owns land in Texas. Many people misunderstand the concept and think that this gives them a level of asset protection which it does not.
There is no statuorily created “Land Trust” in Texas as there are in other states. LLC’s and Limited Partnerships are provided for in Texas by statutes. Judges understand the concept of these entities (LLC and Ltd. Partnership) and understand the protection from personal liability that they provide. Most Judges have never heard of a “land trust”.
A revocable trust does not provide the same level of asset protection as the LLC or Limited Partnership nor does the corporation. As an investor, I personally will use only the LLC or Limited Partnership.
What is the advantage of a corporation for flips? Thanks for the information.
Charley
Land trusts and/or revocable trusts provide asset protection only in the most inclusive sense of the term - i.e.- the supposed anonymity that they provide makes a lawsuit less likely to begin with. I agree that such trusts do not provide a liability shield in the manner of an LLC or other entity. As such, that sort of trust is at best a supplement to an LLC or other entity. Most judges & lawyers have not heard of land trusts, but they tend to have a very basic understanding of trusts in general…which is why I like the term “revocable trust that owns land”…not as “scary” to the legal people.
Whether you use a C-Corp, S-Corp, LP or combination of the above for flips will depend on your individual details. For example, taxpayers in low brackets often want pass-through income, but they have social security tax exposure - so an S-corp or LP can be helpful for both items (see my article on this site for an example). Some people are in high brackets and seek “bracket splitting” opportunities…that is, the ability to have income taxed in a lower bracket. One way to do that is to run some flips through a C-corporation, which is only taxed at 15% on the first $50,000 of income. The list goes on, based on details, details, details. In general, tax concerns make one (or more) of the above-named entity types a superior choice from a federal income tax standpoint.
John Hyre
John,
If I’m understanding you correctly, you believe that you shouldn’t use a LLC if your initial stategy is to wholesale or assign properties? How would a C/S-Corp or LP be better?
The ultimate owner of the flips should normally be one of the above-named entities for tax reasons. Said entities can own single-member LLC’s or revocable trusts that in turn own the properties in order to simplify assignment (i.e. - sell the LLC/trust and its contract on a property instead of assigning the contract itself). Two different purposes drive the underlying structure - taxes for the “master” ownership, ease of assignment for the subsidiary LLC’s/trusts.
John Hyre