Gentlemen,
First off I must say I’ve learned alot from the two of you in various posts. I have a question however. I am in the process of purchasing investment property. They are existing business properties with ongoing businesses, not personal rentals. My issue is this.
A recent divorce has left me with some yrs of child support to pay. That in itself is not an issue. The issue is if I can purchase this business, hold it in an LLC and set it up to be taxed as a C-corp so it does not have pass thru.
My intention is not to hide income, but to be able to keep the income in the business to keep it growing. If it’s pass thru and I get taken back to court…all income from the business becomes mine personally and CS is based upon that number. It should be based on what my personal income is, so if I’m not receiving any more from the business that my current income it won’t matter that the business is grossing 5x, 10x, or 100x that. It stays IN the business to expand/fund it for future growth.
I have been told by an atty that an LLC taxed as a C - corp will solve this pass thru issue as it can hold cash of approx 250k before it would be asked why it has so much cash on hand. That cash would fund new investments, not become income to me personally. I will have at least one employee, and PM’s for the other properties down the road. Therefore my role will be owner, not hands on day to day operation of each business. Tho during the first few months after acquisition I will have to be hands on to a certain extent.
I currently have an S-corp set up and have had for quite a few years, but again this is a pass thru entity so any business profit shows on my personal income statement. So long as I can work in “negative” numbers it’s fine…but that gets harder and harder to do too.
I realize too that the C-corp creates some issues with “double” taxation, but only on distributions. If nothing comes out in the way of dividends, there’s no taxable action.
What you say works in theory? Check with your divorce attorney to see how a judge will view this in reality. He could rule you are hording cash and order you distribute dividends or give the ex some of the shares.
Not a problem there, the atty thing. I wouldn't plan on holding that much cash, it's simply the number I was given during the discussion. The overall plan would be to have around 50k or so on hand at all times for those unknown things, and anything above that would be used to purchase future enterprises and/or expansion of existing ones. Of course there will come a time (one would hope) that there has to be significant distributions. In that case, I have no problem with increased payments if need be. I believe the state max is $1800/mo, just a bit less than double what I'm paying now. When the income makes it sustainable, not an issue.
Eventually I would like to purchase these for my boys to take over when they are old enough, and have gone thru a few years of working for someone else so they know what it's like and don't have a "golden spoon" attitude.
Any pitfalls in purchasing them in their names w/me as trustee until they reach a certain age, at least majority? Probably more like mid 20's or so in reality tho.
And does it make a difference if they were to receive these before or after a marriage? There's that little thing about joint and separate ownership of assets. Wouldn't have dawned on me 12 months ago, but I got a $250k wake up call, so now it's a pertinent question.
Now, it’s getting more complicated. You can do many things to transfer assets to your children. Some leave you in control. Others give them a say, but protect the assets from creditors and spouses. I suggest a sit down with an estate attorney who does succession planning, and don’t forget to run everything past your CPA.
I am not an atty, but this is what I did after my divorce so my ex couldn’t see how my accounting practice was doing. if she knew it existed, she would have wanted a cut. As is, she didn’t find out until I became an employee and began receiving a W-2 from the corp. When the tax strategy worked for me, I switched to S-corp taxation to save SET, but by then it didn’t matter any more.
understand that the court can do whatever it wants, so you MUST stay out of court.
if the ex, atty or court know that you own an enterprise that is making money, it WILL come up.
p-e-r-j-u-r-y is a crime. not telling someone what is none of their business is not.