Need a holding Corp. when just starting out?

Question

I understand that when we finally make our first deal, that property will be in its own LLC. But regarding the ownership of that LLC, my questions are:

1) Do we need to go ahead and form a Corp now before we have any property?

2) Once we buy a property and place it in an LLC, can we own that LLC (or portion of it) personally for a while and then transfer to a Corp once we have enough income for that to make sense?

In case you're wondering why I'm stuck on a Corp instead of LLC, after reading the "Own/Run your own Corp" Rich Dad series, we're decided that we want a C Corp to maximize the fringe benefits. I don't think there'll be any income left to "double tax" for a while.

Pepper...

Michael Plaks · Answer

@Pepper Bradford

99% chance you do not need a corporation and will not be able to get the fringe benefits you hope for. You probably don't even need an LLC.

But everything is case by case. So my advice is that you either invest in a professional consultation with an experienced accountant to evaluate your entity options - or create no entity whatsoever and just do your first deal under your personal names, with adequate insurance in place.

Jason Marino · Answer

Hi Pepper,

I agree generally with the posts above. I do not think that any of the comments were suggesting that entity formation for property ownership is without any value. They appear to be directed more at your situation as an investor who is starting out and whether a limited liability entity is suitable for your situation. What you said in your post directly above is accurate. If you are risk averse and have multiple properties, the most conservative way to try to contain the liabilities generated by these assets is to try to compartmentalize them using separate limited liability vehicles. If you are just beginning with real estate investing, the formation cost and the maintenance cost of the entity or the entities may outweigh the benefits that you are receiving from the protection that the entity or entities provides.

Michael Plaks · Answer

@Pepper Bradford

You (almost) never hold rental properties in a C-corp. Bad idea for many reasons. You (almost) never draw a W2 salary from being a landlord.

Rich Dad examples are for a completely different scenario, such as potentially running a store or a gym or being a traveling guru teaching others about creating corporations and writing fiction books about fictional characters who supposedly influenced you. ;)

Fringe benefits of C-corporations are extremely limited for their owners even when it is appropriate to consider a C-corp for some other reasons. Most of the fringe benefits are designed for non-owner employees.

Jon A. · Answer

Not legal advice: If I owned a single property, I wouldn't bother putting it into a company. Unless I had substantial other assets. People use LLCs to isolate their assets, but if I only had a single asset, what's the point?

What are the "fringe" benefits of holding real estate in a corp? With one exception, I can only think of downsides. Does Rich Dad, Poor Dad guy expressly recommend holding real estate in a C-corp? Bc, again, it sounds like a bad idea.

I'm not a lawyer and this is not legal advice but my understanding is that you can quitclaim title whenever you want. You should verify this with an actual attorney, not just landlords on the Internet.

Joseph Guzzardi Jr · Answer

@Pepper Bradford you my friend are getting caught up in the weeds. Form an LLC and if you are concerned about liability can also purchase umbrella policy in addition to your property ins. As you grow larger than you can consider these other items and utilize CPA and Atty who are actual real estate investors and work with real estate investors.

Marco Anemone · Answer

@Scott Trench, good reply to the OP. I will say however to point #1 you made, that an LLC is for asset protection; It is. However its to protect assets (primarily personal, but not necessarily limited to) beyond the asset(s) being held in the LLC. For instance a personal residence that may have lots of equity, savings account , retirement account, a business that is own by property owner, etc. And possibly even future earnings.

Scott Trench · Answer

I think that forming a C-Corp, and going through this exercise is very good for your lawyer, your CPA, and possibly your financial planner.

Here are a bunch of reasons why this approach is unlikely to benefit you:

1) Sounds like there isn't much to protect here - that this is a single property that will be financed. The point of an entity is usually asset protection.

2) If you set up the Corporation and attempt to buy the property inside of the corporation, rather than your personal name, you will lose access to conventional financing options, likely ending up with higher interest rate debt that will not amortize over 30 years.

3) If you earn less than $150K per year, the losses on the property can offset your income, if you meet certain criteria. I am not certain, but I bet that this is not true if you own through a C-Corp.

4) Entity formation is a pain in the rear, will complicate your life greatly come tax time, and is expensive. You will have to file a tax return for each asset. Unless you enjoy doing this and can do it confidently, you will pay for tax prep work. This is not to mention legal and setup fees. It's not clear to me why there is even a small (but certainly loud) minority that have an LLC for every property. I'm not sure they sleep any better than I do, but they definitely have a much more complicated and expensive tax sason than I do. I suppose if you have a large net worth and can support full-time tax counsel, then this is a "why not" type of decision.

5) A C-Corp is likely to be a much less attractive vehicle than an LLC if you do decide to form an entity. I don't know anybody personally with a C-Corp to hold their rentals. I worry that given the rarity of this use case, that when problems arise, you will need specialized and expensive counsel to advise you. For example, one question that immediately pops up is what happens when you sell the property and want to take out perhaps $100K? Does the business pay a capital gain on this AND then you pay another tax on the dividend?

6) The primary benefit of the C-Corp that you seem to be attempting to harness appears to be "fringe benefits" - this is unclear to me and worries me. I am not a fan of investing in real estate for "Fringe Benefits" - I invest for income and capital appreciation, so that I have money, after tax, that I can spend on the life I want. If I wanted fringe benefits, or to shift as much of my life expenses as possible to pre-tax, I'd probably just buy or start some kind of marketing consulting firm that specializes in taking clients to fancy brunches with a home office and a vehicle. Not buy real estate. The only fringe benefits I'd expect to get that I think are reasonable are credit card points, sometimes. I don't see how a lot of other stuff is legitimately a business expense in the real estate world. The tax tail should never wag the business dog. The business should be profitable first, and then provide fringe benefits second, in my opinion.

There are probably more issues. But, I think you will be essentially alone in the world of real estate investors if you buy your first small property inside of a C-Corp attempting to maximize fringe benefits, rather than appreciation and cash flow.

I hope this helps, and that if you do decide to move forward with your C-Corp, and it succeeds, we'd love to hear about it on the podcast and see if other folks should follow!

Jay Thomas · Answer

An LLC may not be necessary for a single property, particularly if it has a mortgage on it. It's worth noting that an LLC can provide liability protection and other benefits, so depending on your situation, you might still want to consider setting one up. Ultimately, the decision about whether or not to form an LLC for a single property should depend on your individual circumstances. Speak with a lawyer or financial advisor who can help you weigh the pros and cons of using an LLC in your situation.

You may also want to look into other estate planning options, such as creating a trust or will, which can help protect your assets in the event of an unexpected death or disability. You should take time to evaluate which type of legal structure is best for you and your property needs.  Good luck!

Mohammed Rahman · Answer

Hey @Pepper Bradford - so most new investors think it's absolutely crucial to have an LLC, or a corp, or an XYZ...etc. But in reality, it's not needed at all until you hit the scale of multiple deals a month. In instances like this though, as your scenario might be different, I recommend actually speaking with a real estate CPA in your area who understands what you're trying to do and has worked with others before too. BP forums are great, but the answers will vary wildly from post to post :D

Curtis Mears · Answer

@Pepper Bradford

Not sure why you would need a corp, bur I am not attorney. An LLC is used to shield your personal assets. I u as e an LLC to separate personal, but not necessary. If you are going to use LLC, should create before buying property so the title and everything is in LLC name.

Need a holding Corp. when just starting out?

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