When to Incorporate

Question

Good morning BP community - my buddy owns a real estate investing business in my hometown, upstate NY. He started offering an Apprentice program this past summer which I joined. It consists right now of driving for dollars, purchasing lists and cold calling. I've brought 1 deal to the table thus far and received over a $10k check which was great. My goal is to continue with the apprentice program which will ultimate lead me to purchasing multifamily rentals.

My question is - i've been looking into incorporating, I spoke with a company called Anderson Advisors last night and explained to them my situation. They were offering to form an entity for me with a c-corp in NY for wholesaling - and once i start purchasing rentals we would add on to what we are creating. it's $2,700 with an additional $35/month. I have business advisors, tax experts in the real estate field and many other things at my disposal if i do go this route. i wanted to see if anyone had an opinion on if maybe this is worth it at this point.

Please let me know your thoughts. thank you

Eamonn McElroy · Answer

You should walk away.  A professional service firm that advises a taxpayer just starting out to form a C Corp is doing the taxpayer a large disservice.

If you're willing to spend $2,700 on professional fees for consulting at this point in your career, you can get much better advice from professionals who listen to what you're doing and want to hear your goals, then recommend a legal entity structure and/or a tax entity structure that is actually beneficial to you.

My practice has found that under the TCJA:

-C Corps rarely make sense and the best arguments for them over S Corps are usually qualitative rather than quantitative.

-S Corps always beat C Corps from an effective tax rate perspective.

-S Corps are less attractive now over disregarded entities/sole proprietorships and partnerships because of the 20% QBID.  S Corps generally only make a lot of sense when reasonable comp is low in relation to net taxable income or the business is a 'Specified Service Trade or Business' and the taxpayer's net taxable income is above the QBID phaseout.

Best of luck on your journey.  The best structure for you at this time may be a simple single-member LLC that is taxed as a disregarded entity.  This is not advice and I recommend you retain advisors to confirm.

Jake Hottenrott · Answer

@Josh LaRose - congrats on the beginning to hopefully a long and successful real estate career!

To cut right to it, many of these big name firms/gurus sell ridiculously complicated structures that cost money in compliance and fees each year.   I’ve seen situations where there were 4 shell companies set up just to house a single SFR and the tax compliance was costing thousands per year on this.  The client wasn’t even getting any strategy and planning with it.

For the most part, people should start simply and grow into an entity choice instead of picking an entity and trying to grow into it.  This growth should be with a real estate knowledgeable professional and should be guided by touch points through the year and your career, not by a 30 min sales pitch on the phone.

Best of luck and i know you’ll end up with the right choice for yourself!

Josh LaRose · Answer

@Michael Plaks thank you for your feedback, Mike. Glad I inquired about this.

Jennifer Gligoric · Answer

@Josh LaRose  You're smart to want to get a structure set up to limit your liability and to help with tax write-offs, the right structure (if anonymous) can also be a lawsuit preventative.

I also highly agree with @Eamonn McElroy that I would question why a C-Corp is what they suggest starting with?  With our investors, we've found an LLC is more than adequate for typical wholesaling though I also recommend looking into anonymity and making sure that the structure makes sense with the long-range plans you have for your real estate business in the future.

NY is not the easiest or cheapest state to incorporate, and we don't recommend that except for a certain set of circumstances.  I'd get a second opinion - but one thing I do agree on is getting a structure in place sooner rather than later.  If you are sued, it's too late to do anything and you run a real risk of negative consequences with both your credit and having personal assets attached.

Sean Morrison · Answer

That price and their proposal sounds nuts for where you're at. One thing to keep in mind though is that if you are doing wholesaling and buy-and-holds, then you'll want separate entities. That way there is a clear divide between your passive and active incomes.

Ronan Donnelly · Answer

@Josh LaRose, congratulations on your success so far. In terms of legal entity structure, I would strongly recommend starting with a simple structure and when you decide make sure that the structure satisfies your criteria whether is is liability protection, tax advantages, low cost of maintenance. I would also recommend talking to a number of CPA’s and lawyers to get their opinions on what entity makes the most sense.

Josh LaRose · Answer

@Jennifer Gligoric Jennifer - thank you for your response. I am going to do a little more research before jumping into the company I mentioned. My main concern right now are the tax benefits/legal issues, so I will certainly implement some sort of entity structure in the near future, just looks like a have a little more research to do! Thanks again!

Michael Plaks · Answer

@Josh LaRose

First - your mileage may vary.

Asking when to incorporate is akin asking when to get married. For some the answer is "ASAP", and for others it's "never." (Feel free to inquire about my rates for marriage advice anytime.)

A C-corp might be the right answer for some investors, but rarely so for someone who is getting warmed up. I always recommend starting simple and spending time and money on finding and closing deals. Business structures and tax strategies should come later in the game.

Josh LaRose · Answer

@Sean Morrison appreciate the response Sean. Thank you

Josh LaRose · Answer

@Ronan Donnelly Ronan - thank you for the response, I am going to speak to some local investors to see who they use/can recommend. Appreciate your help!

When to Incorporate

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