Names Will Never Hurt You…or Will They?

InvestorDirector.com

Why naming your company is a bigger deal than you think

 Most real estate investors know that they have to form a corporation for their business’s legal protection. It is best to seek the advice of a real estate attorney, an expert real estate investor or a tax advisor so that the type of corporation you choose provides maximal legal and financial protection for your chosen real estate investment activities. Whether you already own a corporation or not, this article was written to show you the importance of choosing a corporate name as it pertains to acquiring business lines of credit. The name you choose for your corporation is more important than you think. In fact, the growth of your real estate business may be depending on what you name it.

 Sticks and Stones Will Break Your Bones…

The name you choose for your corporation can indeed hurt you; or at least set you back for a few years when it comes to obtaining unsecured business lines of credit. To recap, your quest for obtaining business credit will start with the filing of your articles of incorporation paperwork (real estate investors usually form a LLC), attainment of an Employer Identification Number (EIN), and opening your LLC its own bank account. Most important before shopping for business credit is your LLC’s ability to show a profit over two or more consecutive years as evidenced by your corporation’s tax returns. Most banks will consider you to be a true business owner by fulfilling these requirements.

Do not name your LLC (or whatever type of corporation you decide on) with words having anything to do with real estate. This is not a type-o! It sounds counterintuitive doesn’t it? You own a real estate investment company; so why wouldn’t you identify the type of service you provide in its name? The words “Investments”, “Properties”, “Real Estate”, “Home Buyers”, “Home Renovation”, “Development”, “Construction” or any other words in your company’s name suggesting that it has anything to do with real estate is a definite “no-no”.

Banks do not like issuing unsecured credit lines to real estate investors even though they generally like lending mortgage money to them. Banks prefer to issue unsecured credit lines to businesses that are non-real estate based, because banks generally view private real estate investors as illegitimate business people; even if they meet the corporate prerequisites listed above. Banks feel the failure rate and the frequency of fraud in real estate is too high for investors and don’t want to take unnecessary risks by opening up unsecured lines of credit for investors. Banks also want your non real estate based business to be “seasoned” or owned, operational and profit reaping, for two or more years. Some suggestions in naming your company are listed below:

Suggestions: XXX Group, XXX LLC, XXX Partners, XXX Consulting, XXX Organization, XXX Firm, XXX Alliance,

XXX Associates, XXX Company

Don’t Lie!

This doesn’t mean you should select a corporate name such as Optimum Medical Supplies and completely fool a bank into thinking that you are a medical supplier for the purpose of obtaining an unsecured business line of credit for real estate investments. This is fraud and banks always prosecute fraud; especially if you walk away from a fully leveraged line of credit by experiencing financial difficulty, getting slapped with a lawsuit, folding up the business, or going bankrupt. These things happen to real estate investors and if you have obtained a credit line under false pretenses, you could be in big trouble later on. For real estate investors, creating multiple income streams like brokering loans, providing consulting services or forming a small cash flowing company on the side; or forming a subsidiary investment firm (secondary to an already established company) through a partnership can hedge the appearance of the real estate investment business and still be ethical. Landscaping is technically what a property rehabber does. One very talented investor who owned a landscape company and dabbled in real estate on the side got all the unsecured credit he wanted for his business. “Consulting” is a broad definition and technically, all full time investors are consultants. In fact, most of an investor’s time is spent consulting with agents, buyers, construction companies and other investors. One good friend of mine named his real estate firm “(XXXXX) Consulting” and built up unsecured credit lines that most real estate investors never see.

 Shelf Corporations

Generally, a corporation must be able to show 2 consecutive year’s profits to apply for and obtain a business credit line.  It does not take but a corporate name to get corporate credit at vendors such as Staples, Lowe’s or various gas stations. Using small trade accounts such as these, and paying them on time each month, will help build a corporate credit rating while your business becomes “seasoned” for two years.

But what do investors do if they want to speed up the process? Do they have to wait for two years? What if their business doesn’t show a profit during that two years; then what!? The answer to these questions is to buy a pre aged shelf corporation. A shelf corporation is a company or corporation that has had no recent business activity, but had at one point obtained large unsecured business credit. A shelf company can then be bought by a person or group of persons who wish to start a company without going through all the procedures of creating a new one.

Common reasons for buying a shelf corporation include:

• To save the time involved in taking the steps to create a new corporation.
• To gain the opportunity to bid on contracts. Some jurisdictions require that a company be in business for a certain length of time to have this ability.
• To create an appearance of corporate longevity, boosting investor or consumer confidence.
• To gain access to investment capital.
• To gain easier access to corporate credit.

One item to be aware of is the re-aging of the shelf corporation. If the credit bureaus learn about the company being bought or under new management they may list it on their reports. The only way to avoid this is to make sure the credit bureaus do not find out about the purchase of the shelf corporation. Because a shelf corporation is really like buying corporate credit and yields a false front, it has been the object of much debate from an ethics standpoint. Some say it is fraud to buy a shelf corporation, but there are many companies that own and price shelf companies for sale every day. Regardless of your approach, please consult a real estate or corporate attorney before you take any action in purchasing a shelf corporation. The safe bet is to name your company appropriately, obtain small corporate credit lines at vendors, file your taxes and apply for unsecured business credit at the right time.