When is it time to incorporate?

20 Replies

When is it time to incorporate?

I realize that buying property puts you at risk for being sued. At some point, I think you become a target, and should protect your personal assets. Is incorporating a good way to do that? I know insurance protects you, but doesn't the corporation protect your personal monies? When is the right time to do so - incorporate?

Also, what benefits do you get out of having a corporation own your property vs. you personally owning your property? Tax or otherwise?

Get an LLC for each investment property.

Taking the LLC approach has one important tradeoff that you should be aware of; access to high LTV loans (a majority of lenders cap lending to LLCs to 80%).

Regards,

Scott Miller

Originally posted by "EZLoanz":
Taking the LLC approach has one important tradeoff that you should be aware of; access to high LTV loans (a majority of lenders cap lending to LLCs to 80%).

Regards,

Scott Miller

Is that a bad thing ?

It depends on who you speak to (the leveraged money folks don't like this limitiation)...

Regards,

Scott Miller

Originally posted by "thebesthouses":
Originally posted by "EZLoanz":
Taking the LLC approach has one important tradeoff that you should be aware of; access to high LTV loans (a majority of lenders cap lending to LLCs to 80%).

Regards,

Scott Miller

Is that a bad thing ?

Can you give the pro and con of each side, in a sentence or 2?

Thanks :)

Unless you're going to have only a few rentals, I would NOT put each property in its own LLC. That is very cumbersome and can be quite expensive (depending on your state).

If you're doing rentals, the 80% LTV is irrelevant. If you borrow more than 80% LTV, you will have a negative cash flow in almost every market. My LLCs have borrowed 100% of the purchase price many times with the LTV

Mike

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Sorry guys, I am a newbie to this, what is LTV loan?
I found quite interesting your discussion about LLC, in my previous experience I realized that being an owner of LLC is generally much better then being the private owner (not only property btw)!
Is the same apply to Canada? Can you personally live in the property which belong to your LLC?

Thanks

In Minnesota it is easy to form an LLC, but $180 when I checked. So, I am just getting started, and delaying that cost for as long as possible. Tough to be broke! :D

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Don't know if they have them in Canada or not, but not limited to US. It was a German concept that was imported into the US.

Jon

As far as I understand LLC's in Canada only exist for companies that cannot be protected from liability under corporate law: i.e. doctors or accountants.

In Canada you can incorporate federally or provincially. If you incorporate federally your chosen name is protected across the country and you can operate your business in any province you register in. However, registration per province is usually as much as incorporating solely in that province.

If you plan on doing business in many provinces in Canada I suggest incorporating federally (you can do it online through the corporations Canada website for $220 including your NUANS search) and then registering in each province. If you are starting out in one and plan to stay within that province for a while go down to your companies office and register there, in Manitoba it's $340.

It really depends on where you are financially.
First off, my property is own by my bank until the mortgage is paid off.
Second, I don't have much in personal asset. If I get sued, they can't get much, since I don't have much. If you have a lot of personal assets, I would incorporate, until then, I don't really think you have too. I would think about setting up a Living Trust.

Even if you have no assets, you do not want someone being able to sue you personally. They could get a judgment on you that would pop up later when you do own something.

Originally posted by "slimjim43":
It really depends on where you are financially.
First off, my property is own by my bank until the mortgage is paid off.
Second, I don't have much in personal asset. If I get sued, they can't get much, since I don't have much. If you have a lot of personal assets, I would incorporate, until then, I don't really think you have too. I would think about setting up a Living Trust.

That's a mis perception. You really do own the property. You've given the bank a mortgage or deed or trust, but you really do own the thing. Real estate is different than cars, where the lender holds title until you pay it off.

Revocable land trusts will give you some privacy, but don't give any asset protection. William Bronchick's book "Wealth Protection Secrets" gives a pretty good overview. Seems like an optimal (though expensive and complicated) structure is to put each property in a land trust with an LLC as the beneficiary. Then, have a corporation to do the management.

Jon

That's a mis perception. You really do own the property. You've given the bank a mortgage or deed or trust, but you really do own the thing. Real estate is different than cars, where the lender holds title until you pay it off.

Jon

Please correct me if I'm wrong. Yes you do own the property, but in a lawsuit, they can't go after your property since you still have a mortgage on it, only your personal assets.

Indeed, keeping your properties mortgaged to the hilt will keep creditors at bay. They can still put a lien or judgment against a property, though.
Jon

Originally posted by "slimjim43":
It really depends on where you are financially.
First off, my property is own by my bank until the mortgage is paid off.
Second, I don't have much in personal asset. If I get sued, they can't get much, since I don't have much. If you have a lot of personal assets, I would incorporate, until then, I don't really think you have too. I would think about setting up a Living Trust.

Be careful -- your thinking on the subject isn't quite correct. While you might not currently own assets, doing business in your own name opens you up to personal liability. Just because you don't have current assets doesn't mean you are off the hook -- the courts can/will file a deficiency judgment against you for any unpaid liabilities and these will follow you until paid off.

Make sense?

I agree with wealthloop... Many people think that incorporating or getting an LLC name on ownership papers/deeds can completely protect them with the "corporate veil" but I think that concept is old and yes, "the courts can/will file a deficiency judgment against you for any unpaid liabilities and these will follow you until paid off." - wealthloop.

And just a comment on incorporating... please make sure you read what TYPE of LLC you're filing as when going through the process... at least on the state level I know, you can get royally messed up with minimum taxes and etc if you do it wrong... I've worked (not in real estate) with people who have messed up pretty badly.

(New Jersey)

PS - I know this is a pretty old thread - but I couldn't resist putting my 2cents in... :D

ltv is really irrelevant unless you dont have a down payment at all..

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