Posted by Bronchick on September 11, 2002 at 15:52:19:
It is mostly a tax issue:
Generally speaking, I like the corporation for flipping, the LLC or Lim Partnership (treated essentially the same for federal tax purposes, but differently in each state for franchise taxes) for long term deals.
The LLC course covers, in detail, how to do it yourself, but it always makes sense to review the specific tax issues with your local CPA or tax professional.
J. Reed says only fraidy cat investors incorporate - Posted by Angela
Posted by Angela on September 11, 2002 at 13:55:30:
Hi all,
I’m at a bit of an impass. I decided to do REI a couple of months ago and hit it hard reading books, this site, calling people about financing, driving through neighborhoods, hitting the county clerk & property appraiser sites, etc. etc. After visiting a few banks I decided I needed to incorporate first in order to get business financing (seems like a business line of credit would be good if I can get one…or two…). So I decided to start pursuing that, then a couple of things happened to bring me to what now amounts to a slow crawl. First, I was reading John T. Reed’s book “Aggressive Tax Avoidance for Real Estate investors” where he says:
“I get the impression that most of the “little people” who incorporate do so because they think “it’s the thing to do when you go into business.” Plus they’re often scared of failure and/or liability for lawsuits. So they think of a corporation as a way to avoid liability. It is. But when real estate investing is the business’s purpose, a corporation is a costly way to get protection from liability.
If you’re a fraidy cat real estate investor, invest via limited partnerships, not corporations. I don’t recommend limited partnerships, but well-selected ones may be better than not investing in Real Estate at all.
If you take title as sole owner, which IS what I recommend, you can protect yourself from lawsuit liability with appropriate insurance policies.”
I know he has that opinion because, as of the writing of that book (copyright 1989 so it’s an older edition…good ol’ library and free info!!), he was very into exchanging, which you couldn’t do with particular corporation set-ups.
Another thing that put my brakes on is that I went to see a lawyer about incorporating and about general issues in REI and he was a complete jerk. The first thing he said to me was, “You ask questions while I sign checks.” He then went on to sign checks, work on his computer, yell out to his receptionists multiple times, and called me by 2 different names, neither of which was my name. I assumed that he was providing a free consultation because of this behavior so I didn’t say anything but at the end was shocked when he said that it would be $150. (Never assume!! I was told up front that he charges $200/hr or sometimes a $75 consultation fee so I paid just because I had been told of his charges and it was my own fault that I allowed him to treat me like that. An expensive lesson that I shall not repeat. I’m not usually spineless like that but can be when I don’t really know what I’m doing). He didn’t know any of the incorporation answers (or didn’t want to answer them…wanted me to see an accountant for those) so I came out of there without the answers I went in for and without $150.
So…here I sit stunted in my efforts not wanting to repeat my costly error of going to an expensive yet uniformative professional. Yesterday I finally got back on the horse and called a lawyer/accountant and spoke to him over the phone for a few minutes. He recommended either a Sub S or LLC; the Sub S would cost me about $750 for him to set up and the LLC about $500 more. Once again, back off the horse. That’s WAY more than I expected. I was on the Florida Corporation web site the other day because I had read in the archives about someone in Florida doing their LLC themselves on line and it’s not THAT expensive to set up but I don’t really know how to answer the articles and would have a thousand questions about what to do next.
I’ve decided maybe Bronchick’s materials are the way to go but don’t know whether to go LLC or Sub S (and I think he has one set of materials for one and one for the other, right?). My intention is to do rehabs; just me and my husband forming the company. I had just intended on doing a LLC since that seems to be what most people are doing whenI read the archives but I was just reading some of the stuff I had printed out and it says with “active” real estate, you’re subject to self employment tax and perhaps Sub S is the way to go. I really could use some advice. What’s the best way to go for a rehabber (family) bascially going it alone (I do plan on hiring out all the rehab work to contractors). LLC, Sub S or are those just being a “fraidy cat” and I shoud just do a sole proprietor? I’ve been sitting around for way too long here trying to solve this issue without spending thousands of dollars and need/want to get going.
Being a little gun shy with the lawyers now I’m also wondering who has the best forms (deeds, contracts for buying, selling, contractor, etc.) to use so I don’t have to go to a lawyer for that. I’ve read Bronchick’s are good (but what course would I buy to get those?) and I’ve read Louis Brown’s are good (I was at a Florida REI meeting with him the other day and the portions of his contracts that he read seemed good). I need something so I will feel confident with doing it myself.
Thanks for any help you can give.
Angela
Re: J. Reed says only fraidy cat - Posted by Tom (WA)
Posted by Tom (WA) on September 12, 2002 at 11:41:28:
Angela, In one way I feel silly responding to you when you have experts like Bill Bronchik giving you advice, but I do want to add that at this stage in your investing career, I don’t think it makes much difference which form of business entity you chose. Do a LLC or an S-corp. As you develop your direction in investing, you can always change. Incorporating or filing an LLC in my state costs very little and there is no reason in the world to re-invent the wheel or pay an attorney to do it for you. It’s all boilerplate info. Use Bill’s or any of the cheap books. Just fill in the blanks and go file it with your state. The key to the matter is to JUST DO IT!! Start investing even if you have not set up anything. You can move the property to one or the other at any time. I might also add that some sort of liability protection is probably much more important today that it was 14 or 15 years ago. Tom
Re: assest protection… - Posted by PAC-SC
Posted by PAC-SC on September 11, 2002 at 16:37:22:
Angela,
I would recommend that you do see a lawyer, but as with everything else in life I would educate myself in setting up a corp.,LLC or LP. I found I book that is straight forward and to the point, and not alot of complicated law terms. The book is called “own your own corporation” by Garrett Sutton. This book can be found almost anywhere and is always near RobertKiyosaki’s books as it is part of his Rich Dad’s advisors series. The book has a wealth of information in it and will help you make an educated choice about what will work to your advantage as far as taxes and assest protection goes. Hope this helps you out as much as it has me.
PAC-SC
Asset Protection - Posted by Tom (GA)
Posted by Tom (GA) on September 11, 2002 at 15:18:40:
Go to http://www.rjmintz.com and get the asset protection kit. After you read the materials, you will never want to breathe outside of an asset protection plan again.
Tom
J. Reed says only fraidy cat investors incorporate - Posted by Hank
Posted by Hank on September 11, 2002 at 14:32:39:
There are some good authors/seminarians out there that are doing good deals and also sell courses.
There are other seminarians/gurus that used to do lots of deals back in the days but now make thier income from books/tapes.
Then there are guys that did a handfull of deals years ago (and never did well, I might add), that now make thier money selling books/tapes.
I wonder where Reed fits in?
You might want to check out Mark Warda’s books. They are available everywhere from Borders to Office Depo. Many of his books are FL specific, like “How to Form a Corporation in FL” or “How to Form a Limited Liability Corporation in FL”. He also tells the reader why one might want to do these things. By the way, Warda is an attorney and an investor.
Plug his name in at Amazon and you’ll see that his books are all about $25.00 . You might want to plug in his publisher, Sphinx Publishing, at Amazon or Google.com, ( does he own the company? ), to see all the other titles available. I have something like eight of these books and they are all good.
Bronchick’s materials are more expensive but his stuff comes in course form, so there is value added there. I have a bunch of those as well.
Bronchick’s site, Legalwiz.com has several articles on why you might want a C Corp or LLC or other. These articles are written by someone that’s out there doing good deals on a daily basis. Those are the people I listen to.
Woman sues apartment after inhaling smoke - Posted by Bronchick
Posted by Bronchick on September 11, 2002 at 14:20:02:
“Woman sues apartment after inhaling smoke”
Someone faxed me this article today from the Boulder Camera (Colorado newspaper) that detailed how a tenant is suing the owner, an UN-incorporated individual, because she had permanent lung damage from inhaling smoke from a fire that was set by an arsonist on a mattress. She claims that that she slept through the fire because the fire alarms in the building were defective.
Need I say more about liability?
As far as tax issues, a corporation or LLC can do an exchange, so there is no issue there with 1031’s. In fact, the ONLY rationale that Reed gives in his book for NOT forming a limited partnership is the fact that you can be penalized for filing a tax return late (only a couple of hundred bucks, which I have gotten the IRS to waive for me, twice). That’s like saying, “cars aren’t financial worthwhile, since you could get a speeding ticket.”
A major overlooked tax issue in Reed’s book is the fact that YOU MAY LOSE A COUPLE OF HUNDRED THOUSAND DOLLARS in estate tax by owning real estate in your own name. Many people fail to realize that beyond $1M in assets, estate taxes can take between a third and HALF of your estate! Simply owning your assets in an LLC or limited partnership could significantly reduce your estate tax hit because of valuation discounts. So, I guess that “Agressive Tax Avoidance” means making the federal government the #1 beneficiary of your estate?
You decide . . .
Re: assest protection… - Posted by Houserookie
Posted by Houserookie on September 11, 2002 at 20:02:12:
Another good book is by Suzi Orman, “The Road To Financial Success.” It answers over 5000 questions about business, trusts, tax, investments, and more…
Re: Asset Protection - Posted by Hank
Posted by Hank on September 11, 2002 at 16:50:07:
Try this site
And it’s sister site, for fun
Re: J. Reed says fraidy cat investors incorporate - Posted by Angela
Posted by Angela on September 11, 2002 at 15:47:02:
Thanks so much for the FL specific info.! I’ve been on Bronchick’s site many times…probably haven’t read everything that I need to yet.
:0)
Re: Woman sues apartment after inhaling smoke - Posted by Angela
Posted by Angela on September 11, 2002 at 15:40:42:
Honestly, I thought Reed was nuts when I read that…I wouldn’t consider doing this (REI)without some sort of liability and asset protection. I was kind of interested in knowing if anyone here had ever actually been sued or knew of someone who had so thanks for the example. That said, is a LLC, limited partnership, or Sub S the best way to go when rehabbing and flipping with just my husband & I as the business? (and if it’s limited partnership, which of your courses covers that?).
Thanks for your response.
:o)