I am seeking advice from someone who is experienced in the tax lien industry on how to beginning a tax lien business. I will be an up-start. I need advice on the following: How you chose what type of business to file (Corp, LLC, INC), Funding, slight help on the business planning aspects, etc…
Hi,
Do some market research into the cities and states your interested in making investments in, I gather you are interested in actual property tax lien sales and not tax lien certificates.
First let’s start with what a corporation is and where the best place to incorporate in will be (and why). Then we’ll move on to the different types of corporations.
Corporations are considered legal entities all on their own, separate from the business owner, and are formed and licensed in the state they operate in.
You can think of a corporation kind of like a person all on their own. They have to file taxes, can own property and assets, buy and sell assets, raise money, buy a benefits package for its family (the employees), etc.
Because of this separation of owner and business, a corporation provides what is called a corporate veil. This means you and your personal assets, money, etc. are all protected from law suits and are separate from your business.
You may hear the term “Pierce the corporate veil.” This refers to the scenario when someone may want to sue you, for example, and not just your company. But since you’re incorporated and were acting as an employee of your business, however, you have that layer of protection since this person technically can only sue your business and whatever assets it holds.
State laws vary as to how well the corporate veil is protected. This is one big reason why the two most popular states to incorporate in are Delaware and Nevada. Of the two, Nevada is the best. Nevada provides the best layer of protection for business. Basically, the only way for someone to pierce your company’s corporate veil is if you commit fraud.
C Corporations
The basics of what corporations are is described just above this subheading.
A C Corp is completely separate from the business owner. It pays its own taxes, pays you your salary, and then you pay your taxes. In other words, the business’ income does not pass through to your personal income tax reporting’s.
This can lead to what is referred to as double taxation (your company pays taxes and so do you on some or all of your company’s taxable income). While this may seem unfavorable, C Corps provide the widest range of tools to expand your business.
For example, you can have unlimited shareholders so you can raise as much money as you want. Also, C Corps are taxed differently: for the first $50,000 of taxable income, your business would only pay a tax rate of 15% (when a S-Corp pays at the standard rate).
C corps are a good design for companies that make and deal with a lot of money, have many employees and/or shareholders, have little or no chance of making a loss, and if expansion is likely.
Pros and Cons - C Corporations
Pros:
can have more than 75 shareholders
the business does not die when owners leave or pass away
can have multiple kinds of stock
excellent liability protection for shareholders (owners)
ability to raise capital is excellent
ability to deduct vacations (if done right)
business debts do not show up on owner’s credit
Cons:
can be expensive to form
lots of paperwork to file and keep up on
there are more legal and regulatory requirements
doing business in other states can be a pain
double taxation issue
dividends to shareholders must be distributed in proportion to the number of shares they own
S Corporations
S Corporations are basically corporations that have elected to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
The two main points you should know about when it comes to the difference between a C Corp and S Corp is how they are taxed and how many shareholders you can have. There are, of course, other differences; but this article is about giving you the condensed necessary information needed to approach and speak with a professional.
As far as taxes go, S Corps don’t pay their own taxes like C Corps do (thus eliminating the double taxation problem). Instead, the taxable income is passed through to the shareholders (the owners).
In other words, if your company made $100,000 taxable income, you would show that income on your personal tax return (whereas a C Corp would first pay taxes on that $100,000 and then pay you your income and you would pay taxes on that income as well).
This form of pass-through taxation is especially favorable if you expect your company to make a loss for the taxable year. In this way, if your company paid more money out than what it made, those losses would pass through to your personal income taxes and can be written off as deductions (whereas if a C Corp had a loss, those losses would not pass through to your personal income tax).
There is one really nice feature of corporations I’d like to mention (both C and S).
As a corporation, you must conduct an annual board of director’s meeting to discuss your business. They can even be done more often than once per year. The best part is, this meeting and all expenses incurred because of it is tax deductible (and it can be held anywhere in the world).
Therefore, many small business owners schedule this meeting around family vacations. By doing this, their plane ticket, gas, food, etc. can all be written off on their taxes. If by chance you decide to go to Disneyland or some other from of entertainment, you can only write a portion of that off . . . but hey, that’s better than nothing.
Pros and Cons - S Corporations
Pros:
no double taxation
losses can be passed through to individual income taxes
excellent liability protection for shareholders (owners)
ability to raise capital is increased over sole proprietors
ability to deduct vacations (if done right)
business debts do not show up on owner’s credit
Cons:
can be expensive to form
lots of paperwork to file and keep up on
there are more legal and regulatory requirements
doing business in other states can be a pain
limited to no more than 75 shareholders (that number changes at times)
no shareholder may be a nonresident alien of the USA
for the most part, can have only one class of stock
The LLC business structure has become one of the most favorable business structures around, especially in real estate.
It combines most of the advantages of other business structures while limiting their disadvantages. They work much like S Corps; pass-through taxation, provide liability protection and asset protection for owners, require board meetings, business debts do not show up on personal credit, etc.
There is one big difference between the S Corporation and a LLC which makes the LLC structure advantageous.
The following is probably the BEST example of why you need to take some time and think about what business structure is for you and your business.
In an S Corp, if there are 2 owners then income must be allocated to owners according to their ownership interests. In other words, if John and Bob formed an S Corp, they could structure it so John owns 50% of the business and Bob owns 50% of the business.
If, however, John performed 90% of the work over the year and Bob sat at home and did nothing, Bob would still earn the same amount of money as John (or is suppose to by law).
If instead they formed a LLC instead of an S Corp, then profit and losses can be allocated differently than ownership interests. Therefore, John could earn 90% of the income and leave Bob with the remaining 10% even though Bob owns 50% of the business.
You should consider this business structure using the same reasons to consider an S Corp except you should take into account whether or not you want to have control over who earns what profit regardless of ownership in the business.
Also, if you own real estate you may want to become familiar with LLCs.
For example, if you owned 5 rental properties and you had no liability protection and one of your tenants hurts themselves on your property, they could sue you. Everything you own could be attached to the judgment. If, however, you placed each of your 5 rental properties in its own LLC then that person could only sue the LLC that owned the property they got hurt on; all your other assets and rentals are insulated from this lawsuit.
Pros and Cons - Limited Liability Company (LLC)
Pros:
works well with real estate
no double taxation
cost less to form than corporations
less paperwork to handle than corporations
losses can be passed through to individual income taxes
excellent liability protection for owners
ability to raise capital is increased over sole proprietors
ability to deduct vacations (if done right)
business debts do not show up on owner’s credit
flexibility of business management
Cons:
more expensive to form than sole proprietor
more paperwork to handle and worry about than sole p.
there are more legal and regulatory requirements
doing business in other states can be a pain
a little harder to raise capital than corporations
If you incorporate in any entity you will want to get liability insurance and some kind of errors / ommissions and officers / directors insurance to protect you personally if your intending to build a long term business.
You will need to research the market you intend to enter and get to know it from all facets. Also keep in mind existing seasoned investors will try to bid you up and drop the property on you so be sure of your limits and don’t exceed them ever!
Good luck,
GR
Take a step back and explain what you are thinking? Do you have some cash to invest? Are you looking to earn interest or are you looking to buy houses, etc?
Forget the corporate entity for a minute. No need to have one until you know what you want to do. Then you can select the best entity to fit the business.
The description covering the various corporate entities will help once you have a better idea as what you are trying to do.
Goldriver, I trust you meant:
Tax deed sales and not tax lien sales. Nice long descriptive post. Good if you are starting a corporations, etc.
Do some market research into the cities and states your interested in making investments in, I gather you are interested in actual property [u][b]tax lien sales[/b][/u] and not tax lien certificates.
BTL, excellent advice.
Have been in this business of tax liens for long time…HAVE NEVER…had co-investors or corporate investors…IMO …way too much culpability and liability for investing other peoples money. I got enouogh problems if I lose my own $$$, nevermind losing someone else’s.
I learned long ago: You can please all the people some of the time. Some of the people all the time.
BUT it is IMPOSSIBLE to please all the people all the time…they will not like it and will sue you for the least little almost insignificant thing.
They will invest with you and then think they know more about it than you do.