Real estate investing & where to incorporate?

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.

Comments?

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2 Responses to “Real estate investing & where to incorporate?”

  1. Beach_babe9711 Says:

    I would use a trust for privacy, but I would also have a corporation. I had a question, for tax advice i’d always ask an accountant, but was seeing if you would know. someone said a S corporation is better for short term investing, buying and selling, but a LLC is better for long term properties like rentals? I didn’t know is thats true or not.

    The S-Corp and LLC are similar in that the income flows through to the owner/member. They pay taxes at their normal rates.

    I believe there is a difference in how the S-Corp and LLC are treated when it comes to certain allowed expenses or pension contributions.

    To really get the facts I would suggest an accountant. You also have to check the state laws concerning an LLC as there are differences that could be more fundamental to the decision.

  2. Boca Raton agent Says:

    Boca Raton agent asked: Where can I go (link) to find out more info on trusts?

    John Corey replied: I would pick up a copy of Wealth Protection by William Bronchick. It is an inexpensive book that provides a great introduction to the topic. Note that it is very clearly stated that trusts do not provide liability protection. Many investors misunderstand trusts. Bronchick is a lawyer and a RE investor. The book costs less than $20 on Amazon and it is in many of the larger bookstores (the ones with a RE section).

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