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Incorporate: The Life You Save Could Be Your Own!

Posted by Brett Carman on 9/4/2008 at 10:19 AM
Posted in Real Estate

Real estate investors often ask me how they should structure their business. They ask, “Should I be a sole-proprietor, LLC (Limited-Liability-Company), or an S-Corporation?” The answer is “Yes!” In my opinion, there is a time and place for each of these types of organization but I favor the LLC.

In the beginning and certainly if you just own a couple of homes as rentals, the sole proprietor approach should be sufficient. It is an inexpensive way to organize but offers you no protection to the exposure of liabilities. No need to fear! You can insure against this risk with the proper insurance policy which will offer you around $300k in liability coverage in case you lease to “Mr. Slip and fall” and get sued. As you grow your business, you may find that the basic “dwelling” policy gets expensive as you need and want to increase to $1 million.

For example, your needs for protection could change drastically as you purchase commercial properties. You are at risk for much higher liability claims so not only would you want to have more insurance, the time is now for you to change the style of your business organization to one in which can offer you a “shield” of personal protection in the event of a lawsuit or financial crisis. Both the corporation and LLC (offered in most states) can accomplish this layer of protection for your business. Generically speaking and since each State has its own particular rules, it costs less than one thousand dollars to form a corporation. A corporation is treated like an individual person in terms of liability and therefore if the Corporation owns a property or properties and a suit arises, it’s the Corp that gets sued and not the shareholders.

Have any of the readers experienced a situation where they have seen the corporate shield in action?

Brett Carman is a seasoned veteran in the real estate industry for over 17 years. He holds active licenses in real estate, mortgage finance, and property & casualty insurance. Offering a one-stop shop for his residential and commercial clients, he strives to not only educate, but streamline the real estate acquisition process. With a long and proven track record of success, he is uniquely qualified and has a passion for helping people achieve their goals in real estate.

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7 Comments

Posted by member1846692 on 09/06/2008 12:01 AM

We follow this advice on every investment property we put together. The fact is there are a lot more ways you are vulnerable owning commercial property. The mechanism becomes important not only to protect you, but to protect your other assets or partnerships outside of the individual property that may have a problem today.

Blake Ratcliff
The Apartment Guy
www.occupancy100.com

Posted by member1856619 on 09/06/2008 12:42 AM

I observed protection in action recently in a Montana construction materials deal. A very sharp attorney filtered and edited a sharp CEO's messages, letters, and deals coaching him to avoid mistakes that could be construed or gerrymandered around to include him and his corporation as the host of a potential liability. I think it important to permit an attorney to review how one communicates and acts in writings, deals, and meetings then practice the advice religiously. I was a victim once but never again!

Charles G. Nutter, CEO
Silacon Corporation charles@silacon.com

Posted by member1798111 on 09/06/2008 1:21 PM

I know each state treats a LLC different. Does it make a big difference liability or tax wise on where you register?

Chris Frantz
<a href="http://www.springhillfloridarealestateonline.com" target="new">Spring Hill Real Estate</a>

Posted by Business 2000 Foundation.com on 09/07/2008 3:26 PM

If we wanted to see the difference in corporate structure with it's legal definitions, strategies and tax structures is their a manual or course offered from TrumpU?

Do you have a incorporation service EXPERT?

Posted by Josef Katz

on 09/07/2008 9:12 PM

Business 2000 Foundation,
We offer this service:
http://www.trumpuniversity.com/products/entrepreneurship/small-busine...

Posted by John Hoff - eVentureBiz.com on 09/09/2008 10:34 PM

I've invested in real estate some and own a couple businesses and have been fortunate enough to never have the need to rely on my business structure's liability protection.

@ Chris Frantz - Yes and no. Our company provides <a href="http://eventurebiz.com/incorporate/">Incorporation Services</a> and in fact we have a blog article in the works coming which will touch on this topic.

Liability - Nevada provides you the best liability protection for your business structure (LLC and Inc.). Of course nothing is 100% in life, but for the most part, the only way someone can pierce your corporate veil is if you commit fraud. This is not so in other states.

Note, however, that if you live in a different state from NV you can still own a NV Corporation but you will need a registered agent here (I live and work in Nevada).

Tax - this is a big misconception. I've been to so many "Incorporate in Nevada" websites which make me sick because they try to sell sell sell. They tell you how NV is the best state to incorporate in because of the liability protection (perfect) and the kicker is how NV has no franchise tax, no state tax, and so on.

While this is true, NV is a great state to run a business in because it doesn't tax businesses as harshly as other states, all that goes out the window when you live in another state. If you live in CA and you do business in CA but your business is incorporated in NV, your business will be taxed according to CA tax laws, not NV.

However, you will enjoy the liability protection NV has to offer for your business.

I have a blog article you might want to read called: <a href="http://eventurebiz.com/blog/protecting-your-assets/">How To Protect Your Assets Using Business Structures</a> which you might find insightful. (Brett I hope you don't mind the links but I think they will add to this post)

@ Business 2000 Foundation - if TrumpU does not offer this, we have someone who could most definitely help.

Posted by member1891085 on 11/12/2008 10:31 PM

Would it be wise to form an LLC and borrow money for building six condominiums and penthouse on my own land in Cape Breton Island - overlooking the ocean.
I plan not to use any of my own money? Would it be hard to find a bank or an investor for the financing? This is my first project and I could use some advice. The condos will be upper middle class with a nuclear bomb shelter basement. Cape Breton Island NS Canada is a paradise where an elite golf course is being built as we speak, about 20 minutes down the road. World Class Resort is across the street. I appreciate your help or comment. Thanks. reginakirk@gmail.com

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