business type?

Question

I now own 3 multi family homes under my own name.  I am looking at a commercial building also, all for buy and hold.  I need to start a company because I don't want these in my name and need some protection.  I need advice on what type of business to form, LLC, S-corp..etc.  I live in Massachusetts.  I also want to know if I can incorporate in Nevada or Deleware for the tax breaks and own property out of state.

J Scott · Answer

First, how do you know how I run my business and how easily the corporate veil of my business can be pierced?

Second, I don't hold my properties in business entities in order to protect them from personal lawsuits -- I hold them in business entities to protect my PERSONAL ASSETS from a business lawsuit.

In my experience, the more personal assets someone has, the more likely they are to decide that liability protection is important...and business entities are an important aspect of liability protection.

Aaron Mazzrillo · Answer

You are going to hear all kinds of theories on why you need to do all kinds of incorporating so I am glad I am first! I have not a few, but several friends who own millions in real estate all in their own name. They are fair, honest business people and don't skimp on the insurance. Insurance companies retain the best lawyers and they certainly step up to the plate should a lawsuit be filed if you have the correct type and amount of coverage. I have inquired with all of them why they don't at least use trusts and none of them think it is necessary.

I personally use trusts but only to avoid probate and no other reason. They offer no liability relief. The theory is that a lawyer would not be able to easily find your assets and therefore less inclined to sue. However, if you are dragged before a judge and he asks you to disclose your assets the whole trust game is all over.

Some people  want protection for your assets so they use individual LLCs if your apartment bldgs are of high value and there is a lot of equity. I have spoken with many attorneys and they all say the same thing; An LLC does not really offer the liability protection people think it does. As an officer of the company, you can still be sued personally and the corporate veil can easily be pierced.

Bill Walston · Answer

I disagree.  By statute, LLC owners/members (most DO NOT have officers) are protected from personal liability for business debts and claims.  That being said, I agree that there are a few exceptions to the limits on liability for the LLC, just as there are for corporations.  An LLC owner/member can be held personally liable if he or she:

1) personally and directly injures someone;
2) personally guarantees a bank loan or a business debt on which the LLC defaults;
3) fails to deposit taxes withheld from employees' wages;
4) intentionally does something fraudulent, illegal, or reckless that causes harm to the company or to someone else; or
5) treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

This last exception is the most important. If owners don't treat the LLC as a separate business, a court might decide that the LLC doesn't really exist and find that its owners are really doing business as individuals who are personally liable for their acts.  In other words, "pierce the veil."  On the other hand, if the LLC is properly structured and treated as a business separate and apart from its owners/members this rarely happens.

Mitch Kronowit · Answer

That is NOT what J is saying. You place your BUSINESS assets within a BUSINESS entity in order to shield your PERSONAL assets from them. We're talking "inside" or "bottom up" creditors here. If you are personally held liable for damages, it doesn't matter what entity you hold your business in, it's just another personal asset to be attached.

Fraudulent transfers typically involve the moving of assets AFTER a claim or lawsuit has been filed. If you place your business assets into a business entity for legitimate business purposes, that is not considered a fraudulent transfer, it's considered a transaction between innocent parties in the ordinary course of business... something the UFTA actually protects.

Dave Toelkes · Answer

There are no tax breaks to be gained by incorporating.  A business entity is not a tax device, but rather a legal device.

Depending upon where you do business, incorporating in Delaware or Nevade may just add to your cost of maintaining a business entity because you will still have to register your business in the state where you do business.

If you choose a pass-through entity, MA will tax you anyway on your MA state income tax return.

Mitch Kronowit · Answer

With all due respect Aaron, can you please provide the names of some of the attorney's that have told you this??? I'm curious to see exactly what kind of law they practice and whether or not they have personally challenged legal entities in a court of law and won.

If LLC's do not provide any liability protection, then why do they exist? Certainly not for tax advantages. Why are LLC's recognized in all 50 states and why would any California pay $800 a year for one if they are basically useless?

Me thinks if LLC's didn't live up their claims, the word would be out by now and they would be as extinct as the Dodo.

Dave Toelkes · Answer

Since the sole reason for holding your real estate assets in a business entity is to shield them from lawsuits, then the courts can deem these transfers to be fraudulent and easily pierce the corporate veil.

Consult your attorney and discuss the ramifications of the Uniform Fraudulent Transfer Act and how it may impact your situation.

Anthony Murphy · Answer

First off thanks for your advice. What about the benefits of getting grants and money/loans otherwise not afforded to individual investors?  Have any of you received grants or anything of this nature?

Mark Updegraff · Answer

Can you elaborate on this at all?  What if there is a PM company in place to protect the owner personally?

Mark Updegraff · Answer

Contact professionals in your area.  There is no excuse for not utilizing the proper local advisement team.  In the end, the cost of professionals will eliminate enough risk from your investment, that it will provide the greatest return in comparison.  You're going to need an attorney to transfer title anyway.  He will probably advise you that it is based on risk tolerance.  Very conservatives will separate each property out into a separate LLC.  Depending on if you have employee's, things will change.  LLC is best otherwise... I think if your entity is not in the same state as the rental property you will pay double tax somehow.  At least that is what my CPA told me :D

Seriously, get some local professional help :D
Cheers,
Mark

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