J. Reed says only fraidy cat investors incorporate - Posted by Angela
Posted by Angela on September 11, 2002 at 13:55:30:
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.