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When does an LLC also want to incorporate?
Posted by: Black
Date: March 31, 2012 11:15PM
I'm looking into forming an LLC (partnership, me and one other person) for property management.
I've received conflicting advice as to whether we also want to incorporate.
As far as I can tell from perusing various resources the benefit of incorporating is that you're taxed as a corporation rather than "flow-through" (the meaning of which I don't quite understand . . .)
Professional legal advice is available but I really want to have a solid understanding and most of this goes in one ear and out the other.




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Re: When does an LLC also want to incorporate?
Posted by: M A V I C
Date: April 01, 2012 12:19AM
LLC is incorporated. LLP is probably what you're going for. Tax laws for LLCs vary depending on state. "flow-through" is taxed as an s-corp. For property management you want to keep everything separate from your personal stuff to limit liability.

I know one guy how has several rental properties. Every one is a different LLC. They're all owned by an s-corp, which he owns all the shares of.




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Re: When does an LLC also want to incorporate?
Posted by: Black
Date: April 01, 2012 12:48AM
Quote
M A V I C
LLC is incorporated. LLP is probably what you're going for. Tax laws for LLCs vary depending on state. "flow-through" is taxed as an s-corp. For property management you want to keep everything separate from your personal stuff to limit liability.

I know one guy how has several rental properties. Every one is a different LLC. They're all owned by an s-corp, which he owns all the shares of.

My partner wants to do "series" LLC-- one for each property.
Otherwise everything you wrote contradicts what I thought I'd learned already. This stuff makes my head hurt...




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Re: When does an LLC also want to incorporate?
Posted by: mattkime
Date: April 01, 2012 04:13AM
Increases the amount you give to lawyers and accountants.

I suspect that you'd get better advice at www.bogleheads.org





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Re: When does an LLC also want to incorporate?
Posted by: Jimmypoo
Date: April 01, 2012 07:35AM
When it has more than 50 “partners" or reaches a particular amount of revenue.
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Re: When does an LLC also want to incorporate?
Posted by: Robert M
Date: April 01, 2012 09:59AM
Black,

These sources have some useful information:

[www.findlaw.com]
[www.nolo.com]
[www.legalzoom.com]

VITAL: Speak to a reputable attorney. Not one for you and your partners. One for yourself. A reputable attorney who specializes in real estate, real estate management and related corporations will explain to you the differences, the pros, the cons and guide you to what is best suited for your situation.

Robert
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Re: When does an LLC also want to incorporate?
Posted by: M A V I C
Date: April 01, 2012 11:12AM
Quote
Black
Quote
M A V I C
LLC is incorporated. LLP is probably what you're going for. Tax laws for LLCs vary depending on state. "flow-through" is taxed as an s-corp. For property management you want to keep everything separate from your personal stuff to limit liability.

I know one guy how has several rental properties. Every one is a different LLC. They're all owned by an s-corp, which he owns all the shares of.

My partner wants to do "series" LLC-- one for each property.
Otherwise everything you wrote contradicts what I thought I'd learned already. This stuff makes my head hurt...

In that case, it sounds like you'd want a LLC for each and then a parent co that you'd each have ownership in.

The C in LLC stands for "corporation" so I'm not sure where you're learning that LLC's aren't automatically incorporated. Though the laws do vary from state to state. If a LLC isn't automatically incorporated, then I don't see what the point is if it's not a corporation, it's not limiting your liability.

FWIW, I have a LLC and a s-corp.




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Re: When does an LLC also want to incorporate?
Posted by: Black
Date: April 01, 2012 11:33AM
Quote
M A V I C
Quote
Black
Quote
M A V I C
LLC is incorporated. LLP is probably what you're going for. Tax laws for LLCs vary depending on state. "flow-through" is taxed as an s-corp. For property management you want to keep everything separate from your personal stuff to limit liability.

I know one guy how has several rental properties. Every one is a different LLC. They're all owned by an s-corp, which he owns all the shares of.

My partner wants to do "series" LLC-- one for each property.
Otherwise everything you wrote contradicts what I thought I'd learned already. This stuff makes my head hurt...

In that case, it sounds like you'd want a LLC for each and then a parent co that you'd each have ownership in.

The C in LLC stands for "corporation" so I'm not sure where you're learning that LLC's aren't automatically incorporated. Though the laws do vary from state to state. If a LLC isn't automatically incorporated, then I don't see what the point is if it's not a corporation, it's not limiting your liability.

FWIW, I have a LLC and a s-corp.

The C stands for company.




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Re: When does an LLC also want to incorporate?
Posted by: Black
Date: April 01, 2012 11:35AM
Quote
Robert M
Black,

These sources have some useful information:

[www.findlaw.com]
[www.nolo.com]
[www.legalzoom.com]

VITAL: Speak to a reputable attorney. Not one for you and your partners. One for yourself. A reputable attorney who specializes in real estate, real estate management and related corporations will explain to you the differences, the pros, the cons and guide you to what is best suited for your situation.

Robert

Done/doing all that Robert, including all those particular links, thanks. I tried to explain it goes in one ear and out the other and I need to work to develop my own understanding.
I bought an e-book last night and will try to get through it today.




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Re: When does an LLC also want to incorporate?
Posted by: Robert M
Date: April 01, 2012 11:55AM
Black,

You're past the web site and dyi stage. Time to speak to an attorney. Read the book as a suppliment since it's going to be general rather than specific to your state. That and don't forget about the federal ramifications. You should also speak to an accountant that is well versed in real estate.

Robert
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Re: When does an LLC also want to incorporate?
Posted by: GGD
Date: April 01, 2012 01:20PM
I think another important thing for you to do is to clearly list your reasons for doing this in the first place.

If the reasons are more about trying to protect yourself and your personal assets, then consider spending time talking to an attorney.

If the reasons are more about getting the best tax advantage, then talk to an accountant.

Go over the list with the professional that is best suited for the situation and grill them on how a proposed solution directly addresses each item until you can answer the questions yourself if someone asks you. This type of discussion should also generate more items to add to the original list.

I never rush into agreements involving large sums of money, and make sure I fully understand the reasons for doing it before agreeing. When paying high priced professionals, I want more than just a simple "do it this way" answer, I want to know all of the reasoning that leads up to that decision.
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Re: When does an LLC also want to incorporate?
Posted by: Black
Date: April 01, 2012 02:33PM
Quote
Robert M
Black,

You're past the web site and dyi stage. Time to speak to an attorney. Read the book as a suppliment since it's going to be general rather than specific to your state. That and don't forget about the federal ramifications. You should also speak to an accountant that is well versed in real estate.

Robert

I've spoken to/am speaking to an attorney, and partner is also an attorney . . . I really need to struggle through to my own understanding.
I also have on my to do list for today a chat with my accountant (who is a former IRS auditor.) He will explain anything to you with the patience of Job, as long as you can hold a phone to your ear for 3 hours without developing a lasting peripheral neuropathy.
I think I'm good with the "dummies" book now, thanks. Maybe you need to turn your attention to helping Mavic understand that an LLC is not a corporation :-)




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Re: When does an LLC also want to incorporate?
Posted by: Black
Date: April 01, 2012 02:34PM
Quote
GGD
I think another important thing for you to do is to clearly list your reasons for doing this in the first place.

If the reasons are more about trying to protect yourself and your personal assets, then consider spending time talking to an attorney.

If the reasons are more about getting the best tax advantage, then talk to an accountant.

Go over the list with the professional that is best suited for the situation and grill them on how a proposed solution directly addresses each item until you can answer the questions yourself if someone asks you. This type of discussion should also generate more items to add to the original list.

I never rush into agreements involving large sums of money, and make sure I fully understand the reasons for doing it before agreeing. When paying high priced professionals, I want more than just a simple "do it this way" answer, I want to know all of the reasoning that leads up to that decision.

Good stuff, thanks. Working to develop a basic understanding so that I know what questions to ask of the professionals and hos to slot the answers in without just shutting down.




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Re: When does an LLC also want to incorporate?
Posted by: Wailer
Date: April 01, 2012 04:24PM
This is oversimplified, but maybe it'll help you get started. Most of my experience is with C corps in California, but S corps and LLCs are fairly similar.

Corporations are separate entities. They are like people you've created that have their own tax IDs, tax returns, can enter agreements, can be sued, and they can live forever. They are owned by the shareholders who have limited liability for the actions of the corporation; you can only lose what you invest. The shareholders elect the directors. The directors select the officers. The officers run the business. A shareholder can be a director, an officer, an employee or none. LLP, GP, Sole proprietors are not separate entities per se but more like alter egos that have at least one liable party.

Corporations are great for protecting your personal assets. If a corporation can't pay the rent, the shareholders or the officers can't be sued unless they "personally guaranteed" it. It sounds great, but a lot of landlords, suppliers, are leery of doing business with corps and will usually require someone to "PG" it.

For taxing purposes, corps and LLC, and separate taxpayers. They pay federal and state income taxes on profits (income AFTER expenses). This means you can have $1M in revenue, $1M in expenses (rent, salary, etc) and pay no corporate income tax. Of course, any salary you receive will be taxed and the corporation has to match payroll taxes. $100k salary to you actually costs a corp $108k.

The main drawback for most new businesses is that most states have annual fees for corps and LLCs. California charges $800/yr.

If you can afford that, there advantages of incorporating are well worth it if you are in a business with any liability or you have assets that you need to protect. Corps can allow you to pay less tax if you split your income smartly but that is generally for single owner corporations.

If you are starting a new business, forming the business isn't as important as planning how the business will operate and making sure it is a viable business.
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Re: When does an LLC also want to incorporate?
Posted by: Robert M
Date: April 01, 2012 04:38PM
Black,

To build on Wailer's post. something he didn't mention. If you own the S corp, not only do you pay taxes on your salary but you also pay taxes the profit. So, imagine you get paid X salary by the S corp. The company withholds taxes on your salary. You get payed the net. The corp has to match the payroll taxes withheld (not exact but we'll call it that for the sake of discussion). At the end of the year, as the owner (co-owner, etc) of the corp, you have to pay personal income taxes on the profit of the corp. This is _very_ simplified but the general gist of it.

[www.irs.gov]

Robert
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Re: When does an LLC also want to incorporate?
Posted by: Black
Date: April 01, 2012 04:57PM
Thanks, guys.
We do not plan to incorporate. Another attorney friend suggested it as an option (I'm swimming in attorney friends for whatever reason) but everything I've read says there's no benefit, and that it's disadvantageous in terms of how you're taxed.
Gonna read that damn book today, yessirree . . .




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Re: When does an LLC also want to incorporate?
Posted by: M A V I C
Date: April 01, 2012 05:15PM
Quote
Black
Quote
M A V I C
Quote
Black
Quote
M A V I C
LLC is incorporated. LLP is probably what you're going for. Tax laws for LLCs vary depending on state. "flow-through" is taxed as an s-corp. For property management you want to keep everything separate from your personal stuff to limit liability.

I know one guy how has several rental properties. Every one is a different LLC. They're all owned by an s-corp, which he owns all the shares of.

My partner wants to do "series" LLC-- one for each property.
Otherwise everything you wrote contradicts what I thought I'd learned already. This stuff makes my head hurt...

In that case, it sounds like you'd want a LLC for each and then a parent co that you'd each have ownership in.

The C in LLC stands for "corporation" so I'm not sure where you're learning that LLC's aren't automatically incorporated. Though the laws do vary from state to state. If a LLC isn't automatically incorporated, then I don't see what the point is if it's not a corporation, it's not limiting your liability.

FWIW, I have a LLC and a s-corp.

The C stands for company.

Like I said, it depends on the state. Some treat LLC's like corporations, and some do not.




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Re: When does an LLC also want to incorporate?
Posted by: Robert M
Date: April 01, 2012 05:33PM
Mavic,

State is just one factor. Federal is another. Can't look at one without the other. Both state and federal ramifications, pros/cons/etc must be considered in this situation.

Robert
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Re: When does an LLC also want to incorporate?
Posted by: M A V I C
Date: April 01, 2012 05:44PM
Quote
Robert M
Mavic,

State is just one factor. Federal is another. Can't look at one without the other. Both state and federal ramifications, pros/cons/etc must be considered in this situation.

Robert

Yes, that as well. Not saying that's not the case, but that state also has to be looked at (and specifically to how liability is handled - eg as corp or as individual.)




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