A Limited Liabilities Company is a business structure formed loosely on a German style of business called GmbH (legal abbreviation) and literally means limited liability. The concept spread throughout Central Europe and in 1997 the first LLC was formed in Wyoming. The Internal Revenue Service ruled one way and then another, making regulations unclear until 1988 when they ruled to treat multi member LLCs as partnerships and single member LLCs as sole proprietorships for tax purposes. Nearly ten years later, all states had LLC statutes and the Uniform Limited Liability Company act was adopted. LLCs are currently the most popular form of business entity. Note that laws vary from state, therefore you need to be familiar with those in your state.
There are advantages to starting an LLC. For one thing members may be individuals, other partnerships; they may be non-resident aliens or a trust. This allows for more flexibility for the company formation. Distributions need not be equal. If one member invests more or contributes more to the business, that member may reap more of the profits. The agreements of disbursement are stipulated in the LLC operating agreement. Additionally, there need be no organized meetings and minutes, often an unnecessary formality for a small business. Taxes �pass-through� the company, and the individual members are taxed at an individual levels and not the company level according to their profits or losses. While LLCs file tax returns, the company does not pay federal income tax. Consequently, administrative paperwork and accounting are simpler for an LLC. Perhaps the most important advantage to LLCs is that it provides liability protection to the business owners, since owners are considered separate entities from the LLC. Personal assets are not connected to the company if the LLC is in litigation.
You might wonder, �Can anything be simple�? Well, yes, with the proper help some things, like forming an LLC, can be made quite simple. Knowing where to look may be the hardest task. You can hire a lawyer to guide you through the process of an LLC formation, but expect this to be costly. Using an online incorporation company is another option. Online incorporation companies will guide you through the process. Look, to incfile.com for help when filing for a LLC. With their help, the process can be made quite simple. An online incorporation company such as incfile.com will process the paperwork with the state of formation as well as file any necessary IRS forms.
As a real estate investor it is important to choose a business structure that gives you the maximum asset protection as well as the best tax advantages. Although I can’t advise you as to what type of entity you should structure your company as (you should consult with attorney) I can give you a brief overview of the different types of entities.
Sole Proprietorship. A sole proprietorship is basically a one person company and is simply “you doing business”. There isn’t any filing requirement to start you business using this structure unless you are using a fictitious or trade name. If you a using a fictitious or trade name you must file a “d/b/a” or doing business as with your state, city or locality. The only types of fees associated with being a sole proprietor are the licensing fees that your city or state or locality charges for doing business.
Tax Consequences of a Sole Proprietorship. The income made by a sole proprietorship is income earned by its owner. In addition, as a sole proprietor, you report your income, expenses, profits and losses on schedule “C” on your federal income tax return. This income is subject to a self-employment tax.
Disadvantages of Sole Proprietorship .One of the disadvantages of a sole proprietorship is there is unlimited liability. If you got sued everything you have personally is at risk. There is really nothing shielding your personal assets. If your business goes bankrupt, you must file for personal bankruptcy protection to avoid the business debts.
General Partnership. A general partnership is an entity that is formed with two or more parties. No paperwork needs to be filed to create a partnership. In fact it can be formed with a simple handshake. However, it is better to have a partnership agreement that spells out the terms of the partnership. If there is no partnership agreement then the partnership is governed by state law. The majority of the states in the U.S. have adopted the Uniform Partnership act which consists of a set of rules of how partnerships should act if they don’t have a formal agreement.
Liability of a General Partnership. A general partnership has no liability protection for partners. Partners are jointly liability for any acts of negligence. So whether or not a person in a partnership committed a negligent act he or she is still personally liable for that act.
Tax Consequences of a General Partnership.The general partnership itself doesn’t pay taxes it simply files an I.R.S. 1065 form. This is only an informational form that summarizes income, expenses and profits and losses of the general partnership business.
A general partnership is treated as a “flow through entity” which means that the profits and losses of the partnership “flows through” to the partners who report their share of income or losses on schedule “E” of their personal income tax returns.
The way that this works is that the partnership would send each partner an I.R.S. K-1 form that states their share of the partnership profits or losses.
Limited Partnership. In order to form a limited partnership, the partnership must file a “Certificate of Limited Partnership” with the state in which it is organized. There are two types of partners in a limited partnership. There are the general partner and a limited partner. The general partner controls the day to day operation of the partnership and is liable for all business debt where as a limited partner is not responsible for business debts and/or claims.
Liability of a Limited Partnership. The general partner in a limited partnership have unlimited liability and if a judgment is rendered against the limited partnership and that partnership doesn’t have enough assets to cover the claims, the creditor can go after the general partner’s personal assets. Sounds risky doesn’t it? Well it is!
Now unlike the general partner a limited partner has no liability beyond what they initially invested in the partnership. Creditors can’t go after limited partners for the debts of that limited partnership. In addition, limited partners unlike the general partner are not personally liable for acts committed by the general partner unless they participate in management decisions.
Tax Consequences of a Limited Partnership.A limited partnership is also treated as a “flow through entity” for tax purposes. I must point out to you that in “flow through” entities, the owners pay individual income taxes on all net profits of the business. This is the case whether they receive those net profits or not.
Corporation. A corporation is a business entity that carries its own legal status, separate and distinct from its owners. Its’ primary advantage is to provide owners with limited liability against business claims. A corporation requires a filing of an articles or “certificate” of incorporation with the state. There are two types of corporations “C” corporations and “S” corporations. An “S” corporation status must be elected.
Tax Consequences of a Corporation. A “C” corporation files an IRS form 1120 and pays taxes on its net income. The primary disadvantage of a “C” corporation is double taxation. Profits are taxed first at corporate tax rates and then again at the individual level. when owners receive profits from the corporation in the form of dividends.
An “S” corporation is taxed just like a partnership. It files an information IRS form 1120-S and the profits and losses “flow through” to the shareholders. The S corporation sends each shareholder an IRS K-1 which states the shareholder’s share of profits or losses.
Liability of a Corporation. A corporation provides liability protection for its owners (the shareholders). If the corporation was sued, the owners are not personally liable.
Limited Liability Companies. A limited liability company (or “LLC)” is a hybrid cross between a corporation and a partnership. To form a LLC the requirement is that you must file an “articles of organization” with the state. An LLC is owned by its’ members or partners and it is governed by its operating agreement.
Liability of a Limited Liability Company. A limited liability company provides protection for its’ members. The members are not liable beyond their contributions to the company. If the LLC is not able to meet its’ debts, the members are not liable for these obligations. In addition, if the LLC is sued the members are not personally liable. An LLC can be “member managed” or “manager-managed”
Tax Consequences of LLC. An LLC is also a “flow through” entity and for single member LLC the tax reporting requirements are basic. All you have to do is attach an IRS form Schedule C which is a Profit or Loss from a Business to your Form 1040 individual return. You will also have to file IRS form Schedule SE which is a self-employment tax form. On this schedule you will calculate the amount of self-employment tax owed. This self- employment tax is a combination of Social Security and a Medicare tax .If there are two or more members of LLC, then that LLC generally must file its’ taxes as a partnership.
Like I mentioned previously that requires the LLC to file a form 1065. Income, losses, deductions and credits allocated to each owner for the year are reported on Schedule K of form 1065. A schedule K detail is given to the respective members of the LLC detailing their specific shares of profits and losses. They would then use this information and attach the K-1 to form 1040 of their personal tax return and use it to calculate their personal income tax owed.
Limited Liability Partnerships. LLP’s are a special type of partnership designed to provide individual partners with protection against malpractice by other partners in the business. In some states this is known as a registered LLP, or RLLP. LLP’s are primarily designed for professions such as doctors, lawyers and accountants.
So there you have it, an overview of the different types of business entities in which to choose from. In running your real estate business, it is imperative that you to choose the entity that works best for you. Furthermore, you should also seek the advice of a competent attorney and an accountant before choosing a specific entity.
As a rule of thumb you want the best assessment of the business structure that will allow you to keep a significant amount of income that you made from your deals while minimizing the taxes that you have to pay to Uncle Sam. It makes no sense to make the money as a Real Estate Investor and to give a great deal to the IRS just because you didn’t choose the appropriate business structure.
Every state has a nickname and every nickname has a story. As the first state to ratify the constitution following the revolutionary war, Delaware claimed its title as the first state” in the earliest stages of our nation’s history. Since then, Delaware has pioneered a number of other firsts as well. Thanks to a receptive business climate, Delaware is first” in the minds of businesspeople from Fortune 500 companies to entrepreneurs just starting their business. Delaware’s laws create an environment where forming a business entity is fast, convenient and affordable. The state’s judicial system is based on centuries-old principles of jurisprudence, allowing legal issues to be settled fairly and predictably. Among the many tax, asset protection, privacy and other benefits of incorporating in Delaware is a provision of Delaware law that says business owners do not have to live or ever set foot in the state in order to form a business. This is a convenient feature in some respects but unfortunate in others because Delaware offers much to see and do.
For a state small in geographical stature, Delaware boasts a surprising level of contrasts and wide-ranging diversity in cultures, scenery, and lifestyles. Wilmington, the state’s largest city, is in the far northeast corner of the state where the Delaware Bay becomes the Delaware River, a stone’s throw from Philadelphia. Wilmington is a major financial center, headquarters to one of America’s most venerable companies, DuPont, and features an important deep water port.
Traveling south or southwest from Wilmington unveils the contrast between the bustle and energy of Wilmington’s place along the Washington-New York corridor and the decidedly more relaxed ambiance of downstate Delaware. Southward along the banks of the Delaware Bay are a series a small towns where fishing is the focus of many conversations. Cape Henlopen at the mouth of the Bay marks the beginning of Delaware’s 28 miles of Atlantic Coast. Lewes, Rehobeth Beach, Bethany Beach and Fenwick Island are family-oriented beach resorts that draw thousands of visitors from throughout the region.
To the west and further inland, from north to south are the towns of Christiana, site of a well-regarded medical center and teaching hospital; Newark, home to the University of Delaware; Dover, the state capitol; and further south, Milford, Georgetown and Seaford.
Delaware boasts a variety of activities and venues across a wide spectrum of entertainment tastes and preferences. Take your chances with lady luck at the Midway Slots and Simulcast harness racing venue. Dover Downs is the site of a major NASCAR race each season. Cultural and Ethnic celebrations dot the calendar and the statefrom a yearly Jazz festival to lively and interesting Puerto Rican, Italian, Polish and Greek festivals. National and State Parks, environmental centers and nature preserves are located throughout Delaware.
So, yes, you can indeed form your business entity in Delaware without ever once visiting. The professionals at Harvard Business Services, Inc. can help you accomplish that by phone or online, and in person as well if you stopped by the office. With so many things to see and do in Delaware, maybe it’s worth the trip.
If you are starting a business, you must give some thought to the form the business will take. There are a wide variety of choices and some make more sense than others in particular situations. Make the wrong decision and you can really regret it.
In making the decision, it is important that you understand some of the verbiage commonly, and incorrectly, used. You will be told this is all about incorporation, but it really means the choice between a corporation, LLC, and other entities.
The truth of the matter is there are many different business forms you can choose from. A corporation is one of the oldest and most stable, but it is hardly the only one out there. Let’s take a closer look at some of the more popular business entities.
What is the single most common business form in the world? It is the sole proprietor. This occurs when one person just starts doing business. It is highly flexible, but not great overall. You are personally exposed to liability and the tax situation is not great.
The second most popular choice is the partnership. This occurs when two or more people pursue a business venture together. Many people are in partnerships and don’t even know it. As with the sole proprietorship, there is no liability protection in a partnership.
For many businesses, flexibility and taxes are two big issues. They are also positive aspects of a partnership. There are no corporate formalities and taxes flow through to the partners so the entity does not have to pay taxes.
The limited liability company is promoted as the greatest thing since sliced bread for small businesses. The benefits come in the form of flexibility, favorable tax designation as a partnership and protection from personal liability for business debts.
When something is touted by politicians as an answer, one should be wary. The same holds true for the LLC. Yes, it offers flexibility and asset protection, but it also comes with outrageous taxes and fees that make it a less attractive choice.
The corporate entity is the beast of business entities. Created hundreds of years ago, it is the basic business entity of stock markets and multinational businesses. It is best known for providing protection to owners from business debts.
On the downside, a corporation requires a fairly extensive number of formalities to be followed. For many small businesses, this means an attorney is required. Attorneys cost money, which is often something many small businesses do not have plenty of.
To determine the best choice for your business, it is worth slapping down a few dollars to talk with a CPA and attorney. General discussions about business entities are great and all, but you need advice about your specific situation.