On a regular basis real estate investors are confronted with questions concerning liability vs. putting all the property into a corporation or land trust.
Lets quickly get land trusts out of the way. Technically land trusts do not exist so the correct term is ‘trust’. Land trust is a term used by folks who do not work in the legal profession. Second, for all the good reasons to use a trust, liability protection is not one. A trust provides no protection from lawsuits. The reason trusts are even mentioned when discussing liability is a trust can reduce the chance that someone will notice what you own if they conduct a quick search. Keeping some assets off the public radar. If a lawyer is to ask you under oath about your assets you still have to disclose any interest you might have in a trust. A trust is not a real way to minimize legal liability.
What is the right solution? A LLC (limited liability company) or a corporation (C or S) is best answer. Note, I am ignoring the tax implications so get tax advice when setting up a vehicle. Each state also varies a bit in the details for an LLC or corporation so check the specific state regulations.
Next question. What state to incorporate in? Many of us have heard Delaware or Nevada are the way to go. A couple of other states sometimes come up. All kinds of cloak and dagger reasons are given. Keeping things secret, paying less tax, etc. Normally spoken in a hushed tone with a wink as to the right states and how you can put one over on the tax authorities.
“Where to Incorporate? The Answer May Surprise You!” is a brief article by WIlliam Bronchick. He is a practicing lawyer and a real estate investor. Take a look at what he has to say and you will see that some of the ‘advice’ found on the web is misleading at best or illegal in some cases.
There is another reason why being more professionally organized is a smart plan if you want to grow your real estate business. Being too cloak and dagger can actually slow down your growth. Some of the time transparency is good.
Lets leave that for later.