I am new to this but my partner isn’t. He recently told me that if we startup a corporation we will not be able to refinance loans within the corporation. At least he hasn’t been able to find a way to do it anyway. Banks just won’t let him.
Our plan is to start out by opening an equity line of credit, purchasing distressed homes/duplexes, doing some rehab to them, refinancing and pulling our cash out so we can purchase the next place. Once we have a good foundation of properties and positive cash flow we’ll do some rehab and sell, flipping, etc.
Does anyone know of a way to do the initial purchase of our properties under a corporation and still be able to refi?
Mostly for tax purposes but also liability. My partner (the experienced one) doesn’t have a corporation for his other properties and thinks it would be a good idea but isn’t pushy about it. On the other hand I not only believe we should have our assets under a corporate name but I’m also willing to take the necessary steps to find how we can do what we had planned even though we haven’t seen anyone else doing it.
Why not an LLC? The LLC provides the protection of a corporation, but is more like a partnership arrangement. 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 leave the real property still partitionable and subject to liens and encumbrances. I take title in my LLC after placing the property in a land trust. Good luck to you.
I would argue that an LLC is better than nothing at all but there is potential to realize substantial employment tax savings using a S Corp over an LLC.
The owner of an LLC is considered to be self-employed and, as such, must pay a “self-employment tax” of 15.3% which goes toward social security and Medicare.
In an S corporation, only the salary paid to the employee-owner is subject to employment tax. The remaining income that is paid as a distribution is not subject to employment tax under IRS rules.
You can choose to have your LLC taxed as a corporation or S-corp. This means that in the eyes of the IRS, the LLC is a corporation and is subject to all the same tax rules that allow benefit plans. That combines the stronger protection of the LLC with the tax advantages you want.
Corporate stock is considered an “investment” and as such is available to satisfy judgment creditors in the event you are personally sued and lose. So when you rear end someone, they sue you and win, they can receive your corporate stocks . They now own the corporation and its assets, including the rental property.
Member interest in an LLC is considered “personal property” by statute. As such, it is NOT available to satisfy judgment creditors. Both the corp and LLC protect the individual from liability arising within the company. Only the LLC protects the company from your personal liabilities.
Now we’re talking. I’ve heard of the possability of losing your corporation and it’s assets due to it being an “investment”. However the ability to have your LLC taxed as a corporation is new to me. That being said an LLC would definately be the ideal choice. Now I just need to verify that we can refi under an LLC.
I spoke with my partner earlier this evening and he did say that he was only looking into it from a S-Corp perspective.
I feel much better now. Thank you MtnWizard for your help!
Could you further explain this statement to me? “I take title in my LLC after placing the property in a land trust.” What is the reasoning for the land trust?
The LLC protects your personal assets, but your real property remains partitionable and subject to liens and encumbrances. I use a land trust to protect the real property and for asset protection and privacy purposes. The combination of the two provides armor plated protection.