Entity Set-up for Your Business

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Entity Set-up for your business

Disclaimer: I am not a licensed attorney, accountant or financial planner. The information provided in this article is exactly that, information. You should seek a licensed professional when getting ready to establish your business entity, tax strategies, asset protection and retirement planning.

Protecting yourself from liability when you operate a business should be your number one priority. Although there are a variety of entities you can establish based on the type of business you are going to run, I’m going to focus on four of them in this article. They are a Sole Proprietorship/General Partnership, Limited Liability Company, (LLC), S-Corporation and C-Corporation. These entities can be set up for any kind of business. They are not limited to real estate, but as I break them down, you will see where a certain entity will work for you and how it relates to your business.

A Sole Proprietorship/General Partnership is a cheap and easy way to get started with your business. There is no written agreement that needs to be established to start operating and moving forward. A General Partnership only requires a handshake but every partner is liable for their actions and can put the partners at risk based on those actions. The major downside of both is you have Unlimited Liability. If you are sued, the courts can not only go after the assets of the entity, but your personal assets as well.

A LLC, S-Corp, and C-Corp all provide asset protection but differ on your tax planning, shareholder planning and raising capital. Proper formation, annual meetings and operations for your business are essential. Do not co-mingle your personal and business finances and you should follow the procedures of operating your business under one of these entities. It will be easier come tax time and keep you reputable. If you enter into a Family Limited Partnership you will want to consider asset protection and have 2 entities. With the right education and professional help, this will do wonders for your business.

A LLC is a great entity for buying and holding real estate rentals including both residential and commercial properties. Along with a Sole Proprietorship, a LLC has Self Employment Tax. However S.E. Tax does not apply towards rent, royalties, capital gains and any long term passive type income. It is a great entity set up for long term real estate investing.

C-Corps is great for raising capital and if you want to take your business public in the future. The negative side for a C-Corp is double taxation. When you take money out of your C-Corp you have to pay Corporate Tax before you pay your individual Income Tax. Why throw away your money if you are not planning on going public with a C-Corp. This leads us into the S-Corp. A great entity if you are providing a product or service.

S-Corps have no Corporate Tax and no Self Employment Tax. You do need to take a salary but here is where the beauty lies with S-Corps. You can divide the money you take out of the S-Corp into a salary/dividend split. You pay normal taxes on your salary but on the dividend split you only pay income tax. If you made $100,000 in your business and you did a 1/3 - 2/3 split, 1/3 going to salary, you are paying normal taxes on this money and only income tax on the dividend money. You save yourself money with this type of entity and accounting set-up. S-Corps are great for short sales, wholesales, fix ‘n’ flips, any short term real estate investing and any business providing a product or service.

LLC’s, S-Corps, and C-Corps all provide the same inside liability protection. Based on the type of business you are operating will determine the type of entity set-up you will choose to protect yourself. Do not believe the hype of the existence of a ‘bullet proof’ entity. If someone tries to tell you there is such a thing do not believe them. The corporate veil can always be pierced if someone wants to diligently go after you. These are the four most widely used entities but this is the extreme tip of the iceberg for corporate protection. I have not even gone into multiple entity set-ups, talked about insurance protection or asset protection for some real estate investing.

As I have said in the past, in is not what you are being taught but who is doing the teaching. You can learn a lot more by attending Nouveau Riche’s real estate investment college and purchasing their home study course. The educators are millionaires in their areas of expertise and cannot teach unless they have reached this status and prove it. If you are interested in learning more about our college and other products, please contact me in the Contact Us section of my blog.

Happy Investing!

Tony