Posted by ToolBar_SC on July 09, 2001 at 15:34:35:
I’m not a tax professional but, a sole proprietorship is passed through to the individual’s tax return. It is no cusion between yourself and your tenants as far a a legal position is concerned. As a sole proprietorship you are as libel as you are now.
Creating a sole proprietorship in hopes of creating a cushion is a waste of time. A good fairly knowledgable tenant would see right through it.
If you do not to make changes on your taxes, and would also like provide youself some legal cushion; I would suggest forming an LLC. Depending on what state you are in you could form a single member LLC at very little expense. If your in one of the few states that require two members to form an LLC then get your spouse to be a non-voting member.
The only change that will take place on your taxes is in the form that will have to be filled out for the IRS. I don’t know what your states tax requirements are and you should check them out before proceeding.
Will putting my properties in a sole proprietorship have any effect taxwise as opposed to just having them as an individual? I own three duplexes and I’m just trying to put a little cushion between myself and tenants. Checks made payable to company instead of me,PO address ,cell phone instead of home no. etc.I know there are better ways of gaining anonynimity just want to make sure I’m not hurting myself at tax time. Thanks B Wade
A sole proprietor is one who operates on schedule C as a business. You cannot do that with rentals; rental properties are reported on schedule E.
If you want to distance yourself, place title to your properties in land trusts, then form a management corporation to collect rents. When a tenant looks up the ownership of the property, they find only a trust with no further information. If anyone asks, you work for the property management company as an employee (the truth).
A sole proprietor, is an individual who is not incorporated, and does business in his name; (B Wade), or a dba such as BW’s Home Equity. By establishing a business name, you have avoided nothing, in terms of liability or asset protection, or distance from your tenants.
Additionally, tax-wise, a sole proprietor’s tax burden will be larger, as an active investor, than that of an incorporated entity, due to self-employment taxes. The income tax burdens are relatively the same, either way, but the added self empl tax could be substantial, as much as an extra $ 5 to 8K per year, on a net income of of $ 78K or larger.
You may want to consider Bronchicks course, “The ABC of Asset Protection”, which is available on this site, for a nominal amt of cash.
The benefits of incorporating or forming an LLC can be substantial over that of a sole proprietor. Again, you do not form a sole proprietorship. Absent forming any other business entity, as a Corp., Partnership or LLC, you automatically are a Sole Proprietor, if you are in business for yourself.
Re: Sole Proprietor. You need to ask Bronchick - Posted by M.garv (IL)
Posted by M.garv (IL) on July 09, 2001 at 22:31:25:
I have been told that sole proprietors pay in huge tax brackets and miss out on a great number of tax advantages than a coorperation. My advice to you is to post this question to william bronchick or go to his website at legalwiz.com. He is very educated and deals with all kinds of tax situations and from what I’ve seen he would be more than willing to help you out on this situation. He is a regular contributer on this website as well as his own.
Hope I could help
M.garv (IL)
I’m not going to talk about the tax issue. I’m not qualified.
In CA we have what we call a “fictious business statement,” commonly referred to as a “doing business as…” I assume that this is what you mean by a “sole proprietorship.” It is registered with the county and one can get a bank account in the dba name.
This is a very public record which a sophisticated renter could look at easily. However, many will not think to check it out. I used to have all my checks made out to my dba name, which was OXO Property Management. I let everybody think that I was the manager of the property, not the owner.
Slowly, I have shifted the renters over to making the checks out to my name. I now tell potential renters when they look at the house that I am the owner, if they ask. I have decided that there is really not much benefit to have that “cushion” as you call it.
My renters don’t call me much unless they have a problem. The phone is in my house. If I am there, I answer it. If not, they get the message machine. Perhaps if you had a lot of renters or some bothersome ones, it would be good to give them a phone number that has an answering machine and you never directly answer it.
I guess my suggestion would be to just use your own name until you find you are having some problems, then switch over to using a business name, at least with new renters.