LLC or Corporation for my investment group?

[lgame]

i have a investment group for the purpose of getting into real estate..would i benefit more from a LLC or Corp and how?also which one would i be able to take out a bank loan in my investment groups name and have my investment group be liable instead of the members within the investment?

[GuyBBY]

The LLC structure is fine...but I am not a lawyer, and would rather have you PM me further to discuss more about it and I can help.

Guy

[Peter F]

I think in most cases, LLCs are better than corporations. There are a number of reasons why.

1 - LLCs are primarily creatures of contract, so you can define the rights and obligations of the various members yourself. Corporations, on the other hand, are primarily governed by statutes and extensive case law. LLCs, therefore, can be tailored more to your specific business activities. For example, you can determine how the LLC distributes its profits or losses.

2 - LLCs have a distinct tax advantage in that they can pass profits and losses directly on to the members, thereby avoiding the double taxation that takes place in the corporate setting. A corporation is considered double-taxed because it pays corporate income taxes and then shareholders have to pay taxes on dividends that they receive. IRS rules allow LLCs to avoid this double-taxation by having profits and losses passed directly to the individual LLC member.

3 - Finally, LLCs, like corporations, can shield their owners from personal liability. Thus, whether the entity owes money for loans or has a tort judgment entered against it, the owners should not have to contribute any money beyond what they initially invested in the LLC. I know this weighs in favor of both, but given the above, I think LLCs are better.

One major downside to an LLC is that you may have to hire an attorney to create the operating agreement because it is can be rather complex to make sure it says what all the parties want it to say. However, I think the other benefits make it more than worth the trouble.

Two great resources to look at on this point:
The Entrepreneur's Guide to Business Law by Constance E. Bagley and Craig E. Dauchy
The American Bar Association Legal Guide for Small Business

Both available at Amazon.com

[GuyBBY]

This is a book that is an unbelievable, must have resource. It has the CD rom which has a few versions of Operating Agreements. I used the short one, edited to my preferences and policies, sent it to a friend who is a lawyer and he needed to spend no more than 1hr with it, as the templates were great in making sure to cover everything, as well as note where to pay attention to make sure you put info specific to your company there.

Hope this helps: Amazon.com: Forming an LLC: In Any State (Book and CD-ROM) (Entrepreneur Magazine's Legal Guide): Michael Spadaccini: Books

Guy

[Joshua Jones]

I'd have to agree with an LLC, though I am not an attorney, cpa, or an expert in that regard. I have spent thousands of dollars to gain the wisdom of top attorneys and CPAs across the US and they have virtually ALL sided with an LLC for my ventures (several of which were real estate related).

My best advice it to bring an attorney onto your "team", but do your research on the attorney before you pull the trigger and accept their advice. If you have a good CPA and attorney on your team, you are definitely in a better position than if you didn't. You can read all the books in the world on business entities and still not have your answer.

Every market is different, every deal is different and everyone has an opinion. This is definitely the time to start grabbing up the rock bottom real estate - not for flipping mind you, but for passive residual tenant income. I would hold off on flipping for at least another two years (again, my opinion :P).

[CIsaac]

Usually most attorneys would advise LLC for real estate purposes. As for banking, most banks would enter the LLC investment business as the borrower on a loan (therefore the title on your auditor's website would show the investment business owning the property and the money from the properties would be paid straight to the investment business). However, they would still use the owners as guarantors. Run the scenario by your local bank and call your local city bar association office and they should give you attorney referrals.

[lgame]

but with a LLC arent i still liable up to a certain degree unlike a corporation..So far the only negative ive come up with on the corporation is the double tax which could be a BIG thing.

[GuyBBY]

but with a LLC arent i still liable up to a certain degree unlike a corporation..So far the only negative ive come up with on the corporation is the double tax which could be a BIG thing.

The corporation situation would also require you to establish stock/share in the company, and yes the tax structure is such that you would have more headaches than benefits at this point in your business.

With the LLC, sure you can still be liable, it is called "piercing the corporate veil". For example, you need to treat the LLC as a separate person and make sure that the members maintain that separation. For example with my company, (and this is a very basic off the top of my head example so if people want to dissect it and analyze why it is not 100% text book please realize I am making it on the fly before a meeting haha):

While I am the founder, I do not put owner/founder, rather CEO. This allows me to work for Burlington Boatyard, LLC. Also, a situation where the corporate veil can be pierced is if I do things on the side on my own accord that would show the company is not protected against those actions. For example, if I buy us a company boat with my own funds (let's say we don't have enough capital yet to buy one with the BBY account but I really want a company boat) and then at an event we have it on the water and I crash into another boater, or something else unfortunate happens, I cannot simply say “well it’s a company boat so insurance and damages will be covered by BBY, LLC…as it can be traced that it was my individual funding and decision to purchase the boat. There are many examples out there to look at, simply Google “examples of piercing the corporate veil”.

All in all, the LLC is flexible and ideal for the common start up, and you can always elect to incorporate later in the life of the business.

Guy

[Peter F]

GuyBBY is correct, lgame. Unless you are a guarantor on the loan to the LLC, you should not be personally liable for the LLC's debts. The exception, which GuyBBY correctly points out, is when a court decides to pierce the LLC's veil and hold the owners personally liable for the LLC's debts. The standard for piercing the veil varies state to state, but courts will often focus on whether the LLC was an "alter ego" or "sham" set up to protect the owners from liability for their personal activities. As GuyBBY stated, one major factor is whether corporate and personal assets are not clearly divided. There are any number of books about LLCs that you can read that can provide you with advice on how to avoid having your entity's veil pierced - adhering to formal procedures when doing business in the LLC's name is probably the best way.

However, I strongly recommend you look at the books I mentioned earlier, or consult an attorney. I suspect there are many more negatives to the corporate form than the double taxation issue. This may be bold, but I think LLCs ought to be the default form business entities take, unless there is a compelling reason to do otherwise.

[GuyBBY]

Thanks for the acknowlegments of my response Peter, much appreciated, yours was on point and very informative as well!

Lgame, feel free to PM me if you'd like connect and spend some time on specific questions, I have done that many times with others on here and we can talk via email or phone.

Guy