What Is The Difference Between An Authorized Member (AMBR) And A Manager In An LLC?
A Limited Liability Company (LLC) is a versatile legal entity for running a business. Since its relatively recent creation (Wyoming in 1977) it has quickly become an attractive option for real estate investors due to its tax flexibility and strong legal protections.
In practical business operations, many LLCs function either through a designated manager or the collaborative efforts of its members. Under the second model, an LLC may authorize members to make binding legal commitments for the LLC.
You may be wondering about the meaning of "AMBR." That stands for Authorized Member. This designation signifies an individual with the authority to make decisions and act on behalf of the LLC, including signing contracts and representing the business. An AMBR typically holds significant decision-making power within the company's structure
Whichever management framework is adopted, the details need to be outlined in the LLC Articles of Organization and the Operations Agreement. These two documents are the solid foundation of an effective LLC.
Authorized Members in An LLC
As we've said, an authorized member of an LLC is a member (or members) who are authorized by the governing documents to make binding legal commitments on behalf of the LLC. They include:
LLC Managers
A manager of an LLC is either a member or an outside party tasked with performing the day-to-day functions of managing the LLC. These duties are outlined in the LLC Operating Agreement.
Typically, the manager is given the power to perform the following for the company:
Make legal decisions for the LLC
Open and close business bank accounts
Buy and sell property e.g. real estate or financial instruments
Dispose of assets owned by the company
Obtain financing
Hire and manage LLC employees
An important note on LLC managers is that the LLC Manager is not liable for fraudulent statements for the LLC or the actions of any of the members of the LLC.
Basics of LLC Operations
Before you can understand the difference between an authorized member and a manager in an LLC, you should know the basics of LLC operations. In 2018 just under 200,000 LLCs were established in the state of Texas alone. The popularity of LLCs comes from its legal protections for owners, tax flexibility, and its less formal establishment process than traditional corporations.
As mentioned, a properly established LLC requires two foundational documents: Articles of Organization and the Operations Agreement. The first key step in how to start an LLC is filing the Articles of Organization with the state to outline the formation and purpose of the LLC. Governing the actual processes of the LLC, the Operations Agreement is important to ensure an efficiently run LLC and that it affords the most protections and benefits to its members.
The owner(s) of an LLC are referred to as its “members” and the default management is a democratic vote based on the ownership percentage. All the members enjoy protection from any liabilities taken on by the LLC and the LLC is in turn protected from any creditors of its members.
That said, it is imperative that the LLC Operations Agreement is drafted correctly as an ownership interest in an LLC is not automatically protected against personal creditors. If correctly drafted, however, the most a personal creditor of one of the members could obtain is the cash distributions that that member would have been entitled to.
LLC Articles of Organization and Operations Agreement
As one can imagine, an LLC that functions the best and provides a management structure sufficient for the purposes for which it was created will have well-drafted Articles of Organization (legally required to be filed with the state) and Operations Agreement (governing the functional processes of the LLC but not a legal requirement).
Particularly, these documents will contain provisions outlining the duties and privileges of the LLC’s authorized members and managers, if any.
Your LLC: Member Managed or Manager Managed?
Logically, there are only two options for how an LLC functions from a management perspective: democratically managed by the members or managed by an appointed manager. If it is member-managed then having an authorized member imbued with the power to enter the LLC into legal arrangements will often make practical sense.
Which One Is Right for You?
As a generalization, the larger the LLC the more practical it becomes to have a manager-managed model for the LLC. Aside from the practical advantages, the other key benefit from having a manager manage the LLC is to allow for passive member investors.
Many smaller LLCs prefer to manage the company as a team with, if needed, one or more members being authorized to sign on behalf of the LLC.
In either case, the key is getting the LLC Articles of Organization and Operations Agreement drafted correctly. With well-worded foundational documents, an LLC is an ideal flexible legal entity for conducting business.
How Assumed Names Disguise Your Ownership (And Help Make You Lawsuit-Proof)
Your business may operate under an Assumed Name (also called a fictitious name, trade name, or doing business as (DBA).
An Assumed Name is simply any name other than your or your business's legal name.
Value of a DBA/Assumed Name
An "Assumed Name" can help you avoid potential legal pitfalls by giving you a "Doing Business As" name that is different from your company’s official name or personal legal name. It also allows you to have a business bank account even if you're a sole proprietor.
In Texas, we refer to DBA registration as filing an Assumed Name Certificate. Any type of entity structure can file an Assumed Name, whether you are operating as a sole proprietor, a partnership, a corporation, or an LLC.
Public Interest in Disclosure
Public interest in disclosure is the legal principle that a court should have access to relevant information, and that an opposing party (a litigant) should have access to all relevant information to make their case.
Legally speaking, your DBA is the public disclosure associated with the identity of the true party in interest (you) and the location where the party may be served with process (if suit is filed). Public interest in disclosure was created from the belief that is in the public interest to be able to ascertain whom to sue and where exactly the service of process can be performed.
What This Means If You Are Sued
What if your real estate business is taken to court? The potential plaintiffs will be able to benefit from your DBA filing requirements. Each and every day suits are filed against Assumed-Name defendants.
An attorney is probably going to be able to dismiss a suit that is filed against the Assumed Name (usually associated with a corporation or LLC that has a liability barrier). To have a better chance of winning the suit, the plaintiff should refile the case against the true party behind the DBA.
Note: It is not mandatory for a legal entity to have its business headquarters where you conduct business. In fact, requesting an out-of-county service of process gives your legal opponents additional delay and expense. However, this is when many plaintiffs will certainly give up.
What Laws Apply To Assumed Names?
An individual or company may possess as many DBAs as they desire, at the state or county level. A period of ten years can be covered with a single filing. A filing of a particular form may be used to terminate or abandon a DBA.
You should verity the county clerk's website within the county where you have your main headquarters or where you perform your services. Texans can visit the Secretary of State website and fill Form 503 for a state-level filing.
You are required to mention the counties where an Assumed Name will be used in this form. You need to check the box for “All” in case the entity will potentially use its Assumed Name in all counties in Texas.
A notarized DBA filing for people, companies and others is required by the Texas Business and Commerce Code chapter 71. You are required to state the psychical address (location) of your business. In case the county where the company has its main headquarter is different from the proposed county of business, you must file a DBA in both counties.
Let's imagine that you have a California LLC and wish to conduct business under an Assumed Name in Miami. Should you file an Assumed Name certificate in both counties? The answer is YES. Both the domestic and foreign entities within the scope of your business are included in the statute.
State vs. County Filing of DBAs
After you have formed an LLC, you need to get a DBA. However, where should the filing be performed, at the county clerk's office or with the Secretary of State?
The DBA needs to be filed as at both levels, according to the Business and Commerce Code:
"The corporation, limited partnership, limited liability partnership, limited liability Company, or foreign filing entity shall file the certificate in the office of the Secretary of State and in the office or offices of each county clerk as specified by Subsection (b) or (c)."
Even though filing with the Secretary of State is usually neglected by smaller entities who often file just in their local county, you need to consider that the statute says “and” when referring to state and county filings.
The county clerk needs to discover if a proposed DBA is available at the county level. The main thing to consider is that your proposed name should be different from another entity's filed Assumed Name that operates in that county. It is not mandatory to ascertain if a particular name is available, considering the fact that the DBA filing is essentially a notice filing. Simply file Form 503.
There are 254 counties in Texas. Is it important to file in the county where you live when you are obtaining a county-level Assumed Name for daily usage and banking purposes? The answer is no.
You can file for a DBA from El Paso County and the bank will still accept it, regardless if your are operating in Houston.
You should also consider the fact that there is no central data base connecting the Assumed Name records of Texas's 254 counties. You might want to get your company's DBA far from its true base of operations and in a county whose DBA database hasn't entered the online world yet, if asset protection/anonymity is your goal.
What About A Series LLC Doing Business through One of Its Series
Series are viewed as sub-companies, so an individual series has the power to sue and be sued; to contract; and to hold title to real and personal property, according to Business Organizations Code section 101.605.
However, the series has to function or hold title under its own name to fulfill these functions at the series level. This in turn demands that the series obtain an Assumed Name Certificate.
Are there any causes for this situation? Yes there are! First of all, technically speaking, the series is not an independent legal entity. And since it is running under an Assumed Name, is should possess a DBA on file. Additionally, the DBA filing should be conducted both at the state and county levels.
The name of the entity conducting business as an individual series will contain the basic Assumed Name for a Series LLC. As an example: “ABC LLC conducting business as ABD LLC-Series A.” Section 71.103 requires an Assumed Name filing both at the office of the Secretary of State and the county where Series A does business.
Can My Husband and I Own Our Business Together as a Sole Proprietorship?
There are some cases where a couple who run a business together wouldn’t be interested in creating a formal business entity.
The question then becomes: can that business, being run by a married couple, be considered a sole proprietorship?
The answer is yes. The IRS allows a lone exemption for married couples who want to structure their business as a sole proprietorship.
Before going into details on that, there are typically four different kinds of business structures that the IRS recognizes. Those include:
Sole proprietorships
Partnerships
Limited Liability Companies
Corporations
In order for the business you run with your spouse to qualify as a sole proprietorship, the following conditions must be met:
There must be no other employees actively engaged with the business. This includes children or other relatives.
Both spouses must materially participate in the running the business.
With those requirements met, each spouse would be required to file their own Schedule C, reporting their individual share (usually an even split) of the business’s income. Each spouse in the husband-and-wife business (sole proprietor or partnership or other) would also need to file a separate self-employment tax form.
Should My Spouse and I Run Our Business as a Sole Proprietorship?
This, of course, is a separate issue entirely. The big advantage of a sole proprietorship is that it’s one of the easiest business structures to establish. The major disadvantage of this structure is that you and your spouse are 100% liable if the business fails. Sole proprietorships offer no protection from creditors.
Another option that many married couples employ is a partnership. For tax purposes, it can be easier to file since there is only one form involved. On the other hand, the business will be required to obtain a tax identification number. Partnerships might also be subject to state and federal regulations. The major upside, however, is that partnerships offer more opportunities for growth.
There are no regulations that state that if you start a business as a joint venture LLC, which for tax purposes is considered a sole proprietorship, you cannot later change the structure of the business to a partnership, LLC, or anything else. For many married couples, having the option to start as a sole proprietorship affords them the opportunity to hit the ground running. It’s a simple and effective means of getting their business started without needing to file numerous petitions with state and federal agencies.
What makes sense for your business in the early days, however, may not make sense down the road.
3 Key Tax Benefits of Using an LLC Structure
Limited Liability Companies have many useful properties for investors. Most of my clients approach me about forming Traditional LLCs or Series LLCs for asset protection, but often are completely unaware of the potential tax benefits their entity may provide.
Today, let’s talk a bit about the tactics you can use to minimizing your tax liabilities. Specifically, we will be taking a closer look at the tax benefits of an LLC structure.
Tax Status Flexibility
One of the appealing tax benefits of LLCs is that you get to choose the manner in which it is taxed. But owners of Series LLCs don’t have to miss out on the fun. In fact, if you own a Series LLC, you can tax each Series differently if you desire. What exactly does that mean? Let’s take a closer look at how LLCs are taxed.
You may make your pick from any of the following three tax status elections when forming an LLC (or Series within a Series LLC):
Disregarded Entity. A pass-through entity, also commonly referred to as a flow-through entity allows taxes to be passed onto your personal tax return. Learn much more about the benefits of pass-through tax treatment for real estate investors from our previous article on the subject. Single-member LLCs and married couple LLCs are typically treated this way automatically in most jurisdictions.
Partnership. Partnership taxation is the default status of multi-member LLCs, but they may choose to change to S-Corporation or Disregarded Entity status. In entities taxed as partnerships, each member receives a Schedule K-1 and reports their share of the profits and losses. This information, along with a completed Form 1065 for partnership taxation, will be attached to members’ tax returns. In this way, the company isn’t billed, but the members each pay their fair share of the taxes.
S-Corporation. This status makes sense for anyone who would benefit from the lower tax rate on the entity’s first $75,000 in income. It’s treated more like a corporation, albeit with different provisions than the more complex C-Corporation. It also comes with a super sexy form called Form 8332. Filling it out might not be a blast, but the savings sure can be for certain investors.
Note that there is an exception to the flexibility norm. Single-member LLCs are more limited and may be forced to file as a sole proprietorship, then report income or losses on their personal returns. It is also important to be aware that the above are simply tax classifications rather than different types of entities. It can be easy to get the impression that an S-Corporation is an entity when indeed it is a tax status, as a C-Corporation is an entity.
Which tax option will be best for you? As with most answers in the financial realm, you’ll find that it depends on your individual circumstances, status, and ambitions in the real estate business. Only a qualified attorney and CPA should be trusted to give tax advice.
Deductions and Credits Galore For Those Willing to Look
If you’re serious about lowering your tax bill you know the power of deductions. So we recommend that you deduct, deduct, deduct everything that you can. No business expense is too small or inexpensive. See if you qualify for fuel deductions, and take a good written record of everything you really need for work and its cost. It may seem silly if you’re looking at many small receipts or expenses, but the old adage about how they tend to add up is true.
The fact that you may not be aware of deduction and credit opportunities is yet another good reason to have a solid CPA and attorney on your real estate dream team. These pros will often point out savings options you didn’t even know you were missing out on. So go forth and deduct shamelessly. It’s a win-win for both client and CPA.
Personal Assets May Be Leased to the LLC
If a valuable assets drag you into a higher tax bracket, an LLC offers a handysolution. You may be able to minimize this situation by leasing the asset to yourself (specifically, your LLC) with a formal leasing agreement. Such arrangements lower taxable income and often allow for deductions.
For example, a home office is an item you lean on come Tax Season when you’re deduction hunting. Learn more details about the home office deduction and who can qualify from our previous educational resource on the subject. Home offices may not only be deducted from your taxes, but also leased back to your LLC. When that leasing agreement goes through, you can write it off and claim it as a business expense. The fact that this type of business expense
Optimize Your LLC Tax Strategy With The Pros at Royal Legal Solutions
Between the asset protection and tax benefits, LLCs may begin to seem like a no-brainer. But to get the right entity that will do the best possible job for you, you may need Our crack team of attorneys and the CPAs we work with can assist you through any tax concerns you may have. As investors ourselves, we may have some more tips that you haven’t yet learned to exploit. Which ones will apply to you will depend on your personal circumstances.
If you are wondering how Royal Legal Solutions can help you save on your taxes, our consultants are happy to explain your options to you, answer your questions, and when you’re ready, set up your personalized consultation. We look forward to helping you keep more of your income where it belongs: in your bank account.
Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation. TAKE THE TAX DISCOVERY QUIZ
Tax, Investing, and Legal Strategies for Medical Professionals
High-earning medical professionals eventually learn a hard lesson:
The more they earn, the more they pay in income taxes.
And since physicians and other medical professionals rank among some of the highest-paid individuals in the United States, they need tax planning and investment strategies that will protect their assets and build real generational wealth they can pass to their children and grandchildren.
Hard-working doctors and other healthcare pros can take advantage of all the tax deductions, tax credits and tax exemptions that Congress and the Internal Revenue Service (IRS) make possible to reduce their taxable income.
But there are also lesser-known strategies which, when leveraged correctly, can reduce your tax burden and deliver a sound financial plan that gives you what we call “time freedom.”
Here I’ll introduce some of the tax, investing and legal strategies our medical professional clients use.
Tax Strategies for Medical Professionals
As a busy healthcare professional, you work hard to provide quality care to your patients, juggle administrative work, and balance your work with life and demands at home.
That’s why working to optimize your tax situation is probably not at the top of your priorities.
Deep down, however, you know that tax planning should be a key component of your wealth management strategy.
If you are employed by a hospital, a private practice, or a government healthcare department, you’re probably a W2 worker. W2 employees are taxed on gross income first, meaning the IRS takes their cut before you receive your paycheck.
But if you’re a business owner or investor (with the correct structures in place), you can pay the IRS quarterly on your net income after expenses.
To put it another way, when investing through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes.
If you’re like most of our clients, you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs.
This simply isn’t true.
That’s why finding the right CPA to work with is so crucial. You need someone who knows what they’re talking about. It's important to understand there are different tiers of CPAs:
Many CPAs don’t understand that it's possible to save outside the standard deductions. A high-level CPA is someone who earns a high income themselves, someone who has personally found a way to pay nearly $0 in tax by leveraging advanced strategies.
The right CPA helps our medical professional clients achieve and maintain tax rates in the 0-10% range. This accelerates your overall cash flow and net worth.
If you find a CPA with an MBA and who can perform Chief Financial Officer functions, even better— these folks will be able to help you navigate complex tax decisions and make it seem easy.
When you work with that level of CPA, you'll start to find creative (but completely legal) ways to save taxes, even if you're a medical professional with zero investment experience. And that savings can be invested in equally creative, equally overlooked ways.
Such as …
Investing Strategies For Medical Professionals
The median wage for medical professionals (everything from dental hygienists, physicians and surgeons, to registered nurses) was $80,820 in 2023—much higher than the median annual wage (for all occupations) of $48,060. (Source)
However, at a certain point these high-salary professionals realize they need to take steps to shelter their income from overtaxation. And while saving money on tax is important, but the real magic happens once our medical professionals start re-investing those tax savings into tax advantaged deals.
These include:
Private Foundations
A Private Foundation is a self-funded nonprofit organization that shelters income, allowing you to bypass traditional capital gains tax and take advantage of a much lower excise tax rate.
When using the Private Foundation for income sheltering and high-performance investments, the compounding effect can lead to much better returns than traditional investing.
The Private Foundation can even replace your W2 income with a director’s salary for managing the Foundation.
Depreciation Deals
Bonus depreciation is a tax incentive designed to stimulate business investment by allowing investors to accelerate the depreciation of qualifying assets, such as equipment, rather than write them off over the useful life of the asset. This strategy can reduce a company's income tax, which in turn reduces its tax liability.
Medical professionals can claim accelerated bonus depreciation as a limited partner when investing passively into a real estate syndication. As a limited partner (LP) passive investor, you get a share of the returns based on how much you invest.
Similarly, you get a share of the tax benefits as well, as documented by the Schedule K-1 you would receive each year. The K-1 shows your income for a particular asset. In many cases, particularly in the first year of the investment, that K-1 can show a loss instead of an income.
The magic of the K-1 is that it includes accelerated and bonus depreciation. In other words, even while you’re receiving cash flow distributions, the K-1 can show a paper loss, which in most cases means you can defer or reduce taxes owed on the cash flow you’ve received.
Cash Flow Deals
These deals don't offer tax benefits, but can generate so much income that they outperform potential tax savings. Investments in this category include things like algorithmic trading. You can invest in cash flow deals through a tax shelter, such as your Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.
Legal Strategies For Medical Professionals
Estate planning is something everybody needs to do at some point. Lawsuits can happen to anyone, and high-net-worth medical professionals are especially at risk. All it takes is a car accident, an injury on your property, a contractual disagreement—and once somebody knows what you own, they can hire a good attorney to force you to settle out of court.
The way you protect yourself is to set up asset protection. Holding companies can shield anything of value, such as real estate properties and investments. Operating companies can be established for business activities like collecting rent, paying contractors, and signing contracts.
Trusts are a way to guarantee anonymity across all of your entities and assets. They allow you to look like a beggar on paper and transfer your assets anonymously to your heirs, taking the target off your back.
Here are a couple of other legal structures we help our clients set up:
S Corporations
Independent doctors or physicians can create S Corporations to handle their taxes. Unlike regular corporations (where profits get taxed twice), S corporations pass their income, losses, and deductions directly to their owners. An S Corp, or S corporation, is a “pass-through” entity, which means that the profits and losses of the business are passed through to the individual owners and are taxed at the owners’ personal income tax rates.
Instead of paying corporate taxes, each owner reports their share of the business’s money on their personal tax returns, paying taxes at their individual rates.
Solo 401(K)
What about retirement?
If you are a medical practitioner who works as an independent contractor, The Solo 401(k) is an ideal retirement plan because it lowers your taxable income and enables you to build up retirement funds through high contribution limits and almost limitless investment capability.
The Solo 401(k) is a qualified retirement plan, just like hospital-sponsored plans. You can contribute to the plan on a tax-deferred basis. You can also contribute Roth funds to the plan and invest tax-free. With some of the highest contribution limits, the Solo 401(K) lets medical professionals lower their taxable income and grow their retirement quickly.
To Wrap It Up …
Even medical professionals with no investments need entity structuring. Here is what a full legal diagram could look like, which includes asset protection structures, estate planning, and tax shelters.
As you accelerate your tax and investing approach, it's important to add in measures to prevent a catastrophic reset. We can show you how to save $20k or more in taxes during the first year, but you will want to set up additional tax and legal structures over time to continue to reduce your taxes down to the 0-10% range.
Without entities, this would be impossible.
It's also important to protect yourself from catastrophic events, no matter how unlikely, so that you don't have any major setbacks on your journey to time and financial freedom.
Tax, Investing, and Legal Strategies for Tech Professionals
Tech industry professionals thrive on innovation, cutting-edge technology, and rapid growth.
However, navigating the world of personal finance requires a different set of skills.
Whether they're W2 employees or entrepreneurs, experienced tech professionals can earn lucrative compensation packages, which unfortunately means significant tax liabilities. That’s why they have to optimize tax strategies and get professional help navigating complex tax laws.
Or if they own a business or have exited a business, our capital gains page can help (if they made a ton of money in their exit and are looking for tax strategies to offset that).
The unique financial challenges faced by tech workers call for tailored tax, investing and legal strategies to help you make the most of your wealth. These include:
Navigating the world of taxes can be daunting, especially for tech workers with complex compensation packages, stock options, and freelance gigs. With the right strategies, however, you can make an informed decision about the best steps to take to secure your financial future.
Let’s get started.
Tax Planning for Tech Professionals
Equity compensation, a high income, remote work (where your employer is in another state with different laws) … These can make tax planning for tech professionals quite complex.
You have to take a lot into account.
Different types of equity compensation have different tax treatments. For example, Restricted Stock Units (RSUs) are taxed as ordinary income upon vesting. Incentive Stock Options (ISOs) may qualify for preferential tax treatment if certain holding periods are met. Non-Qualified Stock Options (NSOs) are taxed as ordinary income upon exercise. But exercising ISOs can trigger Alternative Minimum Tax (AMT) liability.
Lost yet? It can get pretty confusing very quickly.
I believe a solid wealth management strategy starts with tax planning. Remember: salaried (full-time) tech workers are taxed on gross income first, with the IRS taking their cut before you receive your paycheck.
Compare this to business owners and investors (with the correct structures in place), who pay the IRS quarterly on their net income after expenses.
When you (as a full-time employee) invest through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes.
Tech professionals early in their careers may benefit from Roth conversion strategies, paying taxes now on traditional retirement accounts to enjoy tax-free growth and withdrawals in the future. This isn't nearly as strong as the foundation or depreciation deals, however.
But if you’re like most of our clients, you’re further along in your career, making a good salary, and you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs.
High earners in the tech field spend years growing their career and growing their income. The more they make, the more it hurts to see 20-30% of earnings yanked away by the IRS.
I have good news for you: The right CPA can show you how to layer tax strategies to dramatically cut your taxes and even reach the 0-10% range, depending on how aggressive you decide to go.
(Here's the catch: To achieve 0-10%, you actually have to implement all the tax strategies. That's like eating your veggies, nobody wants to do it.)
Many CPAs don’t understand that it's possible to save outside the standard deductions. Things like tax-loss harvesting can offset gains and reduce tax liability. Charitable giving or even setting up a private nonprofit foundation can also help.
A high-level CPA will be able to help you navigate complex tax decisions and make it seem easy. They can find creative (but completely legal) ways to save taxes. And that savings can be invested in equally creative, equally overlooked ways.
Such as …
Investing Strategies For Tech Professionals
After implementing all the best tax strategies, our tech clients then focus on investing their tax savings into tax-advantaged deals. There are tons of deal types, but there are two categories of investments you really need to know about:
W2 earners should invest in energy or machinery deals that allow them to be a general partner (GP) in the first year in order to claim accelerated bonus depreciation. As of this writing (December 2024), syndications have changed over the past year. They only way to get depreciation as a W2 is to be a GENERAL PARTNER (not LIMITED). This only works for ENERGY & MACHINERY. RV PARKS would require you to be a Real Estate Professional.
If you are a Real Estate Professional, you can also access bonus depreciation from multi-family and commercial investments.
Cash flow deals deals don't offer tax benefits, but can drive so much income that they outperform the tax savings. Investments in this category include things like algorithmic trading and small business funds. One of the top strategies is to invest in cash flow deals through a tax shelter, such as a 501(C)3 Non-Profit Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.
Tech pros need to know about e three "financial freedom" strategies they can avail themself of:
Save on taxes (typically this year)
Generate more cash flow (typically this year)
Create a nest egg so you can retire as fast as possible
The first two are short-term strategies. You can save taxes with Royal Legal's tax strategies (and you may still use a foundation, but only as one of many tools to capture tax savings) and you can generate cash flow with something like algorithmic trading.
Creating a nest egg requires a longer-term strategy. Putting money into your own foundation, THEN investing in cash flow deals is the strongest possible move—as long as you don't want to have a bunch of cash on hand. Because once it's in the Foundation, it's no longer yours. We endorse this strategy because that's the best possible move for anybody interested in achieving financial freedom.
Legal Strategies For Tech Professionals
Software executives, Saas founders, and other tech professionals have giant targets on their back when it comes to frivolous lawsuits.
All it takes is a car accident, an injury on your property, or a contractual disagreement—and once somebody knows what you own, they can hire a good attorney to pressure you until you settle out of court.
The way you prevent this is to set up asset protection before you get sued.
Anonymity across all of your entities and assets is key. Holding companies are where you should place your assets. This could be things like real estate properties or other investments. Anything of value that could be exposed during a lawsuit is important to protect. Operating companies run everything.
So here's what you'll be doing:
#1. Set Up a Holding Company
This is what "holds assets," typically anonymously. There are three kinds:
Series LLC
Delaware Statutory Trust
Hub-And-Spoke / LLC (most recognizable as the Wyoming LLC)
#3. Set Up an Operating Company
This is what does your "operations." Collecting rent, paying bills, performing key functions and transactions. This is what turns into the S-Corp because the money is flowing through (but not held inside for very long) this entity, which allows us to apply tax strategies to it.
In this case, you are mixing both. So you would want to differentiate…
Entity structuring means creating LLCs so your assets are held anonymously and separate from your high risk business transactions. We recommend a holding company for any investments or assets. Then a separate operating company for business transactions, such as your consulting side gig. When the operating company reaches $75k/year income, you should turn it into an S-Corp. etc…
PS - The $75k range (sometimes as low as $50k) is basically where you start to save money on taxes.
The reason it takes until then is that the S-Corporation requires a separate tax return and payroll, which both cost money in the $1-2k range. So it doesn't really pay for itself until a certain income threshold.
Unlike C Corps (that face corporate taxes and then shareholder taxes on dividends), S Corps allow shareholders to pay taxes only at their individual income tax rates, simplifying the process. S Corps split profits into wages and distributive shares, the latter of which is not subject to self-employment taxes. This distinction can provide considerable savings on the Social Security and Medicare tax burden.
We’ll also help you employ different types of trusts to create anonymity at the County Recorder and Secretary of State offices, as well as during probate (so you look like a beggar on paper and can transfer your assets anonymously to your heirs).
My team can show you how to save $20k or more in taxes during the first year, and additional tax and legal structures will continue to reduce your taxes down to the 0-10% range. Without entities, this would be impossible.
Here’s a 20-year forecast that shows how the right combination of tax strategies, investing and corporate entity structure can grow your wealth:
Protect yourself from lawsuits with estate planning, no matter how unlikely you think they are, so that you don't have any major setbacks on your journey to time and financial freedom.
The Path From High Tech To Financial Freedom
You’ve worked hard your entire life. It’s time to gain control over your time and money. Rapidly achieving true freedom requires a good tax and investment strategy.
We help tech executives and other professionals in the digital space save $20k or more in taxes during the first year—then re-invest that tax savings into turnkey properties, ATMs, self-storage syndications, apartment complex rehabs and more. We help them create the right tax and legal structures to continue to reduce your taxes and create true anonymity to protect their money.
In the end, we can help you:
Own assets anonymously so that your wealth isn't at risk
Set up limited liability companies to protect your wealth from lawsuits
Minimize risk by separating your business activities from your assets
Hold each asset in isolation so that lawsuits can't jeopardize your entire portfolio
Use insurance as a last line of defense
Tax, Investing, and Legal Strategies for W2 Employees
Not-so-fun fact: As a W2 employee, you are taxed at a rate higher than businesses and investors.
In fact, no group in America pays more taxes than high-salary wage-earning W2 employees.
Whether you are a medical professional, a tech professional or any other full-time employee for a U.S. company, there are some little-known ways you can jumpstart your tax savings and investment journey.
Let’s take a look at these tax, investing and legal strategies for 9-to-5’ers so you can make an informed decision about the best steps to take to secure your financial future.
Tax Strategies for W2 Employees
Tax planning is a key component of a solid wealth management strategy. Remember: W2 employees are taxed on gross income first, with the IRS taking a portion before you receive your paycheck.
In contrast, business owners and investors (with the correct structures in place) pay the IRS quarterly on their net income after expenses.
When you (as a full-time employee) invest through a properly structured entity, your investment income gets the same tax treatment as a business. This allows you to use your money before deducting taxes.
If you’re like most of our clients, you've been told there isn't much you can do to lower your taxes beyond taking deductions or using retirement vehicles like 401ks and IRAs. That’s why finding the right CPA to work with is so crucial. You need someone who knows what they’re talking about.
The right CPA can help W2 earners leverage tax strategies to achieve and maintain tax rates in the 0-10% range. This accelerates your overall cash flow and net worth.
Many CPAs don’t understand that it's possible to save outside the standard deductions. A high-level CPA is someone who earns a high income themselves, someone who has personally found a way to pay nearly $0 in tax by leveraging advanced strategies.
If you find a CPA with an MBA and who can perform Chief Financial Officer functions, even better— these folks will be able to help you navigate complex tax decisions and make it seem easy.
When you work with that level of CPA, you'll start to find creative (but completely legal) ways to save taxes. And that savings can be invested in equally creative, equally overlooked ways.
Such as …
Investing Strategies For W2 Employees
W2 employees spend years growing their career and growing their income. At a certain point we have plenty of income but 20-30 percent of it is being sucked away by the IRS.
Saving money on tax is important, but the real magic happens once W2 earners invest their tax savings into tax-advantaged deals.
There are tons of deal types, but the top asset classes include real estate, syndications in energy or machinery, and algorithmic trading. In short, deals can do three things:
Give you ROI (for example, after 3 years, you get twice your money back)
Give you cash flow (ex: you get dividends/distributions every quarter)
W2 earners should invest in energy or machinery deals that allow them to be a general partner (GP) in the first year in order to claim accelerated bonus depreciation. As of this writing (December 2024), syndications have changed over the past year. They only way to get depreciation as a W2 is to be a GENERAL PARTNER (not LIMITED). This only works for ENERGY & MACHINERY. RV PARKS would require you to be a Real Estate Professional.
If you are a Real Estate Professional, you can also access bonus depreciation from multi-family and commercial investments.
Cash Flow Deals
These deals don't offer tax benefits, but can drive so much income that they outperform the tax savings. Investments in this category include things like:
Algorithmic trading (ex: Forex)
Small business funds
A variety of deals that call themselves cash flow, meaning they focus on providing you with cash right away.
One of the top strategies is to invest in cash flow deals through a tax shelter, such as a 501(C)3 Non-Profit Private Foundation, to get the initial tax savings as well as tax advantaged portfolio growth.
You see, there are three "financial freedom" strategies at a high level:
Save on taxes (typically this year)
Generate more cash flow (typically this year)
Create a nest egg so you can retire as fast as possible
#1 and #2 are short-term strategies. You can accomplish #1 with Royal Legal's tax strategies (and you may still use a foundation, but only as one of many tools to capture tax savings) and you can accomplish #2 with a good cash flow deal (algorithmic trading, for example).
#3 is a longer-term strategy. Putting money into your own foundation, THEN investing in cash flow deals is the strongest possible move—as long as you don't want to have a bunch of cash on hand. Because once it's in the Foundation, it's no longer yours.
So when we endorse this strategy, it's because that's the best possible move for anybody interested in #3 - achieving financial freedom.
Legal Strategies For W2 Employees
As you accelerate your tax and investment approach, it's important to incorporate asset protection and legal strategies into your plan. The Royal Legal approach for W2 earners lets you:
Own assets anonymously so that your wealth isn't on public display
Set up limited liability companies to protect your personal net worth from lawsuits
Minimize risk by separating your business activities from your assets
Hold each asset in isolation so that lawsuits can't jeopardize your entire portfolio
Use insurance as a last line of defense in case everything goes wrong
Even a W2 employee with no investments needs to set up legal support. Everybody needs an estate plan, not just for their kids but also in case they become incapacitated and need someone to help make medical and financial decisions (ex: car accident, COVID, etc...).
Setting up an LLC, even as a small consulting or investing firm, can give you options to a big range of new strategies.
Once your LLC hits the $50-75k income mark, the S-Corp election becomes your best friend. S Corps utilize pass-through taxation, meaning income and losses "pass through" the company directly to the shareholders.
Unlike C Corps (which have corporate taxes and then shareholder taxes on dividends), S Corps allow shareholders to pay taxes only at their individual income tax rates, simplifying the process.
For businesses generating between $75,000 and $250,000 in profits per owner, electing S-Corp status can offer significant savings. While LLCs face self-employment taxes on all profits, S-Corps split profits into wages and distributive shares, the latter of which is not subject to self-employment taxes. This distinction can provide considerable savings on the Social Security and Medicare tax burden.
The S Corps elections also means you can write off business expenses such as equipment, work meals, travel and more. For example, you can depreciate vehicles—80% if under 6,000 lbs or 100% if over 6,000 lbs.
You can even pay your kids to work, typically up to around $14k/year. They avoid income tax and you avoid having profit taxed at your normal income tax rate. Win/win!
There’s a Path to True Financial Freedom For W2 Employees
You’ve worked hard your entire life. It’s time to gain control over your time and money. Rapidly achieving true freedom requires a good tax and investment strategy.
We can show full-time, W2 workers how to save $20k or more in taxes during the first year. Then we give you access to high performance deals and model out different investment options so you can see the best path to rapidly achieve your financial goals.
The Private Foundation. Oil & gas syndications. Machinery deals. And short-term rentals. These are your best options as a W2. The list of deals that outperform traditional stock market investments (and sometimes provide additional tax benefits) is long.
Take a look at a typical 20-year plan that includes asset protection structures, estate planning, investing and tax shelters:
Seeking Anonymous Company Ownership? Here's How To Hide Your LLC
The main reason you might want to know how to hide ownership of a company is to prevent lawsuits.
I'm going to talk about the concept of anonymity, and one of the most effective tools for maintaining your status as a real estate investing ninja is the Anonymous Trust. When set up correctly, the anonymous trust can be extremely effective at hiding ownership of your corporation/LLC—which in turn prevents you from being sued.
Here are three simple steps you can follow to hide company ownership and prevent lawsuits.
Step #1: Form an Anonymous Trust For Your Business
The Series LLC reduces your liability exposure, which effectively limits the potential damage a lawsuit can do to you. What it doesn't do is stop the lawsuit from happening in the first place. On the other hand, an anonymous trust can. If you truly want to make your company litigation proof and protect your assets, you need an anonymous land trust.
The probability of a lawsuit happening is based on three separate components: legal, factual, and financial. An anonymous trust will attack each of those motivating factors. What this does is reduce the chance of a lawsuit happening in the first place.
Step #2: List Your Anonymous Trust as a Member of Your LLC
Yes, believe it or not, you can do that, at least in America. (You have several options when it comes to structuring your business assets.) Anyway, this tactic targets the financial component of a lawsuit.
Why?
Because lawsuits only happen when a plaintiff believes they have a reasonable case for seizing assets to cover damages. If there's nothing they think they can seize from you, they won't sue you.
The anonymous trust structure enables you to hide company ownership by listing your company as a member in your LLC’s Articles of Incorporation. Another advantage of an anonymous trust is that you don't have to file it with the state. This means the people who want to sue you won’t be able to access your ownership information in the public records.
There will be nothing to associate the assets with your name, shielding you from potential legal action.
Note that you can use this strategy with any type of LLC, including the Series LLC.
Step #3: Allow Uncertainty to Work Its Magic
People sue you because they want your money. Most of the time the people suing you have little to no money in the first place. And if they don't have enough money they can't pay a lawyer to sue you.
People usually get around this obstacle by offering their lawyers part of the settlement. This means it's up to the lawyer whether or not you get sued.
If a lawyer is uncertain about whether you own assets worth anything, they won't waste their time trying to sue you. After your anonymous trust is in place it will be next to impossible for someone to determine what you own.
No lawyer is going to spend months or years trying to figure out what you own, period. I would know, I'm an attorney myself.
I hope you enjoyed this article. If you want to hide company ownership, make sure you do it right. To learn more about setting up an anonymous trust, visit our Land Trust hub or take our investor's quiz and find out if engaging with us is a good option for you.
Introducing The Anonymous Trust LLC
One day you're living life, enjoying the profits from your real estate investments. The next day you're trying to figure out how you got sued. That's life.
According to a Clements Worldwide study, Americans face the greatest risk for being sued. The risk is even higher if you own real estate. Are you willing to roll the dice on your future? Investing in real estate without asset protection is like betting against the house. You might come out on top, but you're more likely to lose everything.
Asset protection was a tool of the rich for generations. Regular folk usually weren't aware of strategies to protect wealth (such as the anonymous trust LLC), or they were unable to afford it. Today these techniques are accessible to everyone, thanks in large part to the introduction of two new legal structures.
The Series LLC Structure
In the past, investors held companies under their name or a single entity. This created a jackpot scenario, where successful litigators could access the person's entire wealth. Savvy investors would spread assets between multiple entities, but creating and maintaining a host of businesses proved too expensive for most.
The series LLC changed the way assets are held. It makes it possible to spread assets across multiple holding companies, but reduces the filing and management expense to that comparable with a single LLC. For more information, learn the basics of the LLC structure.
The Anonymous Trust LLC Structure
The problem with a series LLC is that you can still be sued one property at a time. It doesn’t make you invisible. This is where an Anonymous Trust LLC comes into play.
Using a trust in this manner allows you to hide the ownership information of your company, including its assets. As a result, plaintiffs are unable to identify you or target you based on whatever juicy assets may be ripe for the picking. That information is invisible.
A Lawsuit Can Affect More Than One Property
Just because your assets are wrapped up in a traditional LLC doesn’t mean you’re protected. Unlike the series LLC, where your assets are spread out individually, a traditional LLC groups assets into one basket. While there are some legal benefits to a traditional LLC, it still leaves you vulnerable to attack. In any case, here's a short list of what you should and shouldn't do.
Asset Protection "Do"s and "Don't"s
1. Don't Hold Property Under Your Name
Individuals have the least protection of any entity. Maintaining ownership status as yourself is the worst possible scenario and leaves you open to the maximum level of risk. A simple mishap, such as someone slipping while on your property and being denied insurance coverage, could result in a devastating legal battle and even wipe out your life savings.
It’s essential to create a company structure to hold your assets separate. This will make your legal person litigation bullet proof.
2. Don't Hold All Property in a Traditional LLC
While this is a much better scenario than personal ownership, it still leaves you exposed to losing everything under the LLC’s ownership. Which means you could lose all your assets, not just one.
A series LLC, on the other hand will offer twice as much protection.
3. Don't Leave Yourself Exposed Because You’re A “Good Person”
Lawsuits have nothing to do with whether you mean well. Instead, most lawsuits are based on accidents and misunderstandings, not fraud or malicious intent. The purpose of asset protection is to provide coverage when things don’t go as planned. Ask yourself: “Would I be comfortable giving them access to my bank account or credit card?”
It’s always a good idea to have an insurance plan, but you shouldn't assume they will pay by default. There are a variety of ways your coverage can be reduced or denied. These range from state and local policies to your payment status or specific instances surrounding your claim.
Are You Sure You Can Count On Your Insurance Company?
Successful investors are experts and managing risk. Purchasing insurance is a good example of this, but having a Plan B takes things to the next level.
Let’s go through a fictional scenario. Imagine one of your newly acquired properties has a rotting staircase and someone accidentally trips and breaks their toe.
Most people would expect the insurance company to cover this unfortunate incident, but this time the insurance company fights back. They claim you exhibited gross negligence and are individually responsible for your guest’s injury.
This lands you in a tricky situation. The best case scenario is to endure a series of stressful negotiations and come out on top. Unfortunately, this doesn't always occur and you could be left holding the bag, exposing your life savings and assets in the process.
Smart risk management requires good up front decision making, such as purchasing a solid insurance plan. But it also includes having a plan for when tragedy and the unexpected strikes. In this case, it means not only carrying insurance, but protecting yourself from potential failure of your insurance.
You Can Be Fully Protected Within A Week
Did you know it's possible to create a scalable company plan in as little as a week? This plan includes both the company setup and the transfer of properties to the new legal structure, and the benefits are legion.
Compared to traditional structures, our asset protection plan provides a layered defense against lawsuits. Not only do we split your assets across various holding companies, but we veil your wealth in anonymity. This strategy makes you unappealing to most would-be plaintiffs and makes your assets inaccessible to the rest. Most people struggle to pay the upfront costs of a lawsuit and agree to split the winnings with their attorneys. An asset protection plan for Royal Legal Solutions costs less than the typical attorney fees for a single lawsuit and lasts for a lifetime.
Lawsuit prevention is important, but cobbling together a complex network of business entities can be difficult and expensive. Each LLC requires its own filing expenses and management. It adds up fast and the maintenance doesn't scale. Compare that to our custom solution, which provides no hidden costs and comprehensive service. If you want to learn more, contact us today.
Establish a Network to Increase Net Worth
Your network is your net worth. To grow your network is to increase your net worth.
Our CEO, Scott Royal Smith, reminds our clients that their network IS their net worth. You can find many success gurus and experts who have similar beliefs.
Entrepreneur, author, and speaker Porter Gale, author of "Your Network Is Your Net Worth," says: "I believe that your social capital, or your ability to build a network of authentic personal and professional relationships, not your financial capital, is the most important asset in your portfolio."
Recently, Scott sent out a newsletter to our clients. In it, he shared, "Many entrepreneurs work within a vacuum, often wearing many hats and spreading themselves too thin. When you leverage your network, you are tapping into collective wisdom that would otherwise take you years to acquire on your own. The result is you'll be more quickly equipped to solve complex challenges unique to your situation."
What are the secrets to networking?
There are no secrets, but you must network to increase net worth
I don't know about you, but when I hear the phrase build your network, all I can think of is the dreaded practice of NETWORKING! Here's the catch, establishing, solidifying, and growing your network does not come naturally nor easily to most of us, including me.
Yet, what I learned over time is that building your network is not about going to events and forcing your way into awkward small talk conversations. It is about finding ways to make genuine connections.
Connections with other people are your greatest asset when done with the right intention. Finding the right people to collaborate with along the way is just as crucial as finding the best investment property.
Why is networking important?
Networking is a critical step to increasing your wealth
Let's examine that question, shall we?
You can't succeed alone. Trust me, I tried. My success came from my expertise, actions, and hard work for much of my career. However, my success stalled over time, and my stress levels increased. I had to do some solemn self-examination to get to the root of this dilemma.
Do you know what I found? As much as I thought I was Wonder Woman and could do it all, I was WRONG. If I genuinely desired massive success, I needed other people to help me. When I realized this truth, it forced me to look beyond myself.
Use these questions to establish and plan your network:
How can other people help me?
How can I help other people?
Are you stalled or feeling overly stressed and frustrated with your results?
How can networking translate to an increase in net worth?
Your network is your biggest asset and a way to add value
Others have what you need and need what you have. It helps to remember that building a network is not a slimy or needy one-way connection. Your relationship creates value if there are advantages for both of you.
It is essential to be clear and confident about what you need and what you can give. For instance, if you are a natural connector who enjoys introducing people to one another, find people who need a connector in their network.
On the other hand, many connectors are not good with the details. So, the best person to look to add to your network is one who can help with more information AND needs a connector. Success does not simply come from creating value; it comes from finding people who want to work together using their God-given talents and abilities.
How do I choose the right people to work with me?
Work with allies who share your vision
The right network brings you joy. In her book, "Joy at Work," Marie Kondo says: "Build a network full of people you enjoy spending time with and helping, who care about your development and success. Believe that you can have a more fulfilling life and contribute more to the lives of others when you're comfortable. Then say goodbye with gratitude to any relationship you no longer need and nurture those that you decide to keep."
I frequently find people with large networks but feel no joy or energy from having them. When they are honest with themselves, they discover that their networks drain them. Perhaps, that's because they created a network with a misguided intention of only taking or only giving instead of the common practice of giving and receiving.
When you focus on building your network as a collective, providing others what they need and receiving what you need, and finding people who bring you joy in collaborating, your net worth will increase.
What are the key takeaways?
Networking helps increase net worth
Remember these critical things about networking because it:
is essential for your success
potentially translates to much higher profit for you
only works if you approach it with fidelity
Ready to begin networking in our community of people just like you? Join our Royal Academy Discord Server. This platform provides a space for fellow real estate investors and entrepreneurs to share, learn, and collaborate with each other and our staff.
Sole Proprietorships: What Business Owners Should Watch Out For
Creating a sole proprietorship is simple. Filing taxes for a self-owned small business is pretty easy as well.
But it also means your business is in YOUR name.
That might be fine today. It might be fine tomorrow. But down the line?
Take real estate investors, for example. If a renter sues you, all of your personal assets are at risk. Your bank account, car, and home are all on the line if you lose a lawsuit.
The wealthiest real estate investors in America know better than to use a sole proprietorship because it simply doesn’t offer the level of protection they desire. Other corporate structures are safer. Other corporate structures give them advanced asset protection—and they're just as inexpensive and easy.
Here are some things you should watch out for when you’re thinking about forming a sole proprietorship for your real estate business (or any other small business).
A Sole Proprietorship Puts Your Personal Assets at Risk
A sole proprietorship isn’t really an incorporation; whoever makes money through it pays income tax on that money themselves—and that’s that. You might have to file some paperwork, but that’s just so the state can keep tabs on what you’re up to. It's simple. You might want to form a husband-and-wife business as a sole proprietor or partnership, for example.
So what’s the legal implication of operating your real estate business this way?
To answer that, let’s review how income should flow:
You incorporate your business, filing the proper paperwork with your state
Your business generates income
Your business pays you as an employee (or separate entity)
The key words in the above bullet points are “separate entity.” When you form an LLC or business trust, you separate the business (your rental property) from you (your car, your home, your savings). In the grand scheme of things, it seems like an incredibly small distinction. In the legal world, it’s incredibly important.
When you’re a sole proprietor, you’re the only entity. You’re taking full responsibility for everything that occurs at your rental properties while keeping in mind that there are certain disasters that are simply outside of your control.
When you’re a business owner, the business takes the brunt of the liability. After all, that’s why it’s called a “limited liability” company.
There isn’t anything wrong with this form of incorporation, they just aren’t as safe as other options.
What Can You Do Instead of Forming a Sole Proprietorship?
What options are available if you decide to go a different route? What are the best asset protection structures? And are they affordable?
Using these structures to organize your business allows you to protect it from lawsuits by separating your personal assets from your business assets. That means, in the event of a lawsuit, the assets at stake are the property itself, not everything you own. If you’re found liable for some sort of issue at any of your rental properties, the worst thing that can happen is the loss of that specific rental property.
Finally, it isn’t even that costly. In many states, it only costs a few hundred dollars to open an LLC, and even less to maintain it year-to-year. Compared to other forms of asset protection, it’s very inexpensive.
Couldn’t an Umbrella Insurance Policy Do the Same Thing?
Instead of going through all of the trouble of setting up separate LLCs for each of your rental properties, why not just purchase an umbrella insurance policy?
There’s nothing inherently wrong with an umbrella insurance policy, but you should understand that, if you’re found liable for an issue at your rental property, as soon as you make a claim, an agent is assigned to find a way to deny coverage. After all, that’s how real estate insurance companies make money and stay profitable: by collecting more money on premiums than they hand out for claims. If you’re denied coverage, everything is at stake. There isn’t a safety net.
Again, that doesn’t mean an asset protection insurance policy is a bad idea—you should always be protected against events like floods and fires, but some methods offer more protection than others.
Want to make sure your real estate investing business is protected? Start with our investor quiz and we'll help you find ways to protect your assets.
A Sole Proprietorship Doesn’t Protect Your Anonymity; Series LLCs Can
Furthermore, LLCs offer a degree of anonymity that dissuades potential lawsuits. If the potential plaintiff’s lawyers can’t find the name of the person who is supposedly at fault for whatever occurred at their property, they can’t find a way to file a lawsuit against that person. When you’re a sole proprietor, your ownership of real estate is public record. It’s easily accessible to anyone with a computer and an internet connection.
When you use LLCs to organize your real estate assets, the names of those LLCs can be whatever you like, making it much harder (and in some cases, nearly impossible) for lawyers to track down the owner of the property.
That means proprietorships don’t protect your anonymity while LLCs and other forms of incorporation do.
Conclusion: Sole Proprietorships Come At A Cost
Doing business as a sole proprietor is easy. In fact, it’s so easy that as soon as you sign the dotted line on your first rental property, you’re a sole proprietor whether you know it or not.
However, there are better ways to protect your assets. If you’re found liable for an issue at your property, everything from your primary residence to your children’s college funds is on the line in.
If you lose, you could lose everything. It’s better to structure your companies in a way that makes this scenario impossible. You can do this by forming a Series LLC or whatever is appropriate in your state, and we highlight some of the advantages of doing this above, including asset protection, low costs, and anonymity.
Interested in learning more? Check out our related articles:
Is an LLC Structure Important for Real Estate Agents?
One of the first decisions you have to make as a small business owner (and yes, a real estate agent is a small business owner!) is how to structure your new venture.
A business structure dictates how you operate, the tax guidelines you have to follow, and what kind of legal protection you have if problems arise; therefore, it is vital that you choose the right type of structure for your business.
When you start your own real estate investment company as a real estate agent, it is doubly important that you protect your assets with the right business structure. Due to the nature of the business, it is essential that you are protected from potential consequences of litigation. Dig deeper into why anLLC structure for real estate agentsis important and how Royal Legal Solutions can set you up for success.
What is an LLC?
A Limited Liability Company (LLC) is a type of business structure that protects its owners from losing personal assets if the company is sued. An LLC also offers tax advantages that differ from a Sole Proprietorship or more complex corporations.
As a business structure, LLCs are typically used by small business owners who want to limit their personal liability. This includes Realtors/real estate agents.
Is a Real Estate Agent Considered a Small Business Owner?
Real estate agents who also invest in real estate are considered small business owners. According to the IRS, real estate agents are treated as self-employed and considered a small business owner if they:
What is the Best Business Structure for a Real Estate Agent?
The short version? The best business structure for real estate agents who own a real estate investment business is an LLC.
An LLC structure for real estate agents provides several benefits to real estate agent investors over other business structures. Among them:
Benefit #1: It Protects Assets
Protecting your personal assets is one of the biggest benefits of structuring your business as an LLC. If you are sued, your brokerage insurance may not cover the damages. If you operate as a sole proprietor, every single asset you own can be liquidated in a lawsuit.
When you structure as an LLC, however, your personal assets are protected. You would simply liquidate the LLC and start a new company. This is why an LLC is so important for real estate investors.
Benefit #2: It Saves Taxes
As an independent contractor, you are subject to the self-employment tax for independent contractors. The good news is that when you form an LLC and work with a knowledgeable legal real estate firm, you can choose to have your LLC taxed as a different type of entity.
An LLC is a legal designation rather than a tax designation; therefore, you can still be taxed as an S Corporation. S Corporations are not subject to the self-employment tax, which covers medicare and social security, that independent contractors have to pay, which benefits you.
Benefit #3: Self-Directed Retirement Accounts
When you structure as an LLC, you can use your LLC to start a Solo 401(k). With this account, you can buy tax-free investments, become a hard money lender and earn a high-interest rate on the money you loan. You can also loan money back to your LLC if needed.
Benefit #4: Professionalism
An LLC operates as the face of your business. When you're talking with clients about potential investment properties, speaking on behalf of a business organization rather than your personal name goes a long way. This lends a sense of professionalism and trust to those you work with in the real estate investment industry.
Work With a Legal Real Estate Team
As a real estate agent, you might not have considered the need for a corporate structure. But did you know 80% of real estate investors will be sued in their lifetime?
Are you prepared?
Don't let a frivolous lawsuit destroy your future. The correct LLC structure covers you in case your broker's insurance decides to leave you hanging. The right structure might be the difference between losing it all or just losing your LLC.
In the video below, Scott Smith, founder of Royal Legal Solutions, explains the best structure for real estate agents to pay fewer taxes through multiple tax strategies and shield themselves from litigation when deals go south.
When you work with a legal real estate team like Royal Legal Solutions, you set yourself up for success. You’ll learn how to maintain your LLC corporate structure to avoid losing your business. You'll benefit from our team’s expertise onasset protection structures that will protect your personal assets and build a wall of defense if a lawsuit happens.
Additionally, Royal Legal Solutions can help you work around the single-member LLC self-employment tax so your income is considered passive and you retain the financial benefits.
Protect Your Assets With Royal Legal Solutions
If you are a real estate agent who owns your own real estate investing company, ensure that you are protected from personal liability. Work with Royal Legal Solutions to structure your business as an LLC to avoid personal liability and gain the tax benefits of operating as a Limited Liability Company.
Want to make sure your real estate investing business is protected? Start with ourinvestor quiz, and we'll help you find ways to protect your assets.
When It Comes to Taxes, Is Managing Rental Properties a Business or an Investment?
Whether you are the landlord of a single-family rental or you own a share in a large apartment building, it’s essential to know how to classify this activity at tax time.
Are you an investor or a business owner?
In this article, we’ll examine the distinction between the two and how qualifying as a business owner can save you money in deductions.
Rentals that qualify as a business
Your rental activity qualifies as a business under the law if you can prove your rentals are “for-profit” and that you work at this business “regularly and continuously.”
Landlords can hire managers and contractors to do most of the work on their property, but they still must be engaged in running the rentals, according to the law. Also, if a rental unit is vacant, it doesn’t preclude you from qualifying as a business owner -- as long as you are marketing the space for rent.
Here are other factors the IRS uses to determine if your rental activity is a business:
the type of rental property you own—commercial versus residential
the number of properties you rent out
your or your agent’s involvement
the lease terms – such as whether it is a short-term or long-term lease
the types of ancillary services provided under the rental agreement
whether you have filed all required forms
Here are some other ways you can prove you are operating a business with your rental property:
The ‘three of five years’ test
If, as a landlord, you have earned a profit in three of the past five years, the IRS sees you as a business. If you cannot meet this requirement, you must pass the “behavior” test.
The behavior test
You can operate rentals at a loss every year and still qualify as a business owner if you meet the behavior test criteria. Here are the factors an IRS auditor will use in this case:
Operations. Are you operating as a business would?
Expertise. What is your knowledge of real estate?
Time and effort. How much of your time do you devote to being a landlord?
Experience. How long have you been in the business, and what is your track record?
Money management. What is your profit/loss history?
Appreciation. How has the value of your property fared over the time you’ve owned it?
Your net worth. What other income and assets do you have?
Your lifestyle. How do you spend your time when you are not working as a landlord?
In order to pass the behavior test, you need to maintain excellent records, including a time log of all your real estate activities. You can establish your expertise through references, blogs, speeches, and podcasts.
Rentals that do not qualify as a business
Landlords often do not qualify as business owners when they do one or more of the following:
buy and hold land for future sale
passively invest in mortgage notes
invest as an LP (limited partner) in real estate syndications
have a small portfolio of rental units that are either leased out and don’t require much management
own triple net lease properties
What you gain as a business owner versus an investor
For tax purposes, it’s always better for your rental activity to be a business rather than an investment. As a real estate business owner, you can deduct the following:
start-up costs
home office expenses
passive losses from real estate
fees and costs for attending conventions and seminars
IRS Section 179 expenses
Landlords who meet the criteria of being business owners may qualify for the pass-through income tax deduction of up to 20% of their net rental income from 2018 through 2025.
This deduction—which is also called the Safe Harbor Rule—is part of the Tax Cuts and Jobs Act (TCJA), the tax reform package that became law in 2018. The deduction will end on January 1, 2026, unless Congress votes to extend it.
Use of the safe harbor rule is optional. To qualify for this deduction, a landlord must:
perform a minimum of 250 hours of real estate rental services each year (including work by employees and agents)
maintain records that document these real estate rental services
keep separate records showing all income and expenses for each rental enterprise.
Landlords who use their rental property as their residence for more than 14 days during the year are not eligible for the Safe Harbor Rule. This requirement means that most short-term rental hosts may not apply for the deduction.
Finally, we cannot emphasize enough the importance of record-keeping as a landlord. Accurate, well-organized records will help you manage your rental property, prepare your financial statements, keep track of your expenses, prepare your tax returns, and support the items you report on your tax returns.
Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation. TAKE THE TAX DISCOVERY QUIZ
How Limited Partnerships Protect Canadians Investing in the United States
Are you a Canadian real estate investor looking to buy property in the United States?
Canadians investing in the United States don’t usually think about the ugly prospect of litigation. But it's something you should take into account.
“The U.S. is a very litigious country,” says Scott Smith, lead attorney at Royal Legal Solutions. “That’s why you need proper asset protection in place.”
You can’t depend on insurance companies to cover you, either. You need asset protection structures to protect your holdings. For Canadian investors, that’s usually a Limited Partnership.
While American investors are generally better off holding their real estate assets in a Series LLC or other LLC structure, the Canadian real estate investor has a different legal obstacle course to navigate.
So how does a Limited Partnership benefit Canadian real estate investors with assets in the United States? For one thing, it means you’ll only lose one asset at most if you are ever sued—and hopefully none at all. Let’s take a closer look.
Parts of a Limited Partnership
A Limited Partnership is formed and filed at the state level (like an LLC). It must contain four parts to be legally binding:
The Partnership Agreement
The Limited Partner(s)
The General Partner
A Certificate of Formation (filed with the state)
The General Partner is typically a traditional LLC or shell company filed in the state where the Limited Partnership will be conducting business.
The Partnership Agreement must be drafted to isolate all of the operations to the General Partner while allocating all of the profits to the Limited Partner(s). You (the investor) are the Limited Partner.
Accurate execution is vital to ensure that liability attaches to the General Partner/LLC, while all of your actual assets and profits are protected. Get help from a qualified attorney to make sure you’re protected! Overlooking minor details in a Partnership Agreement or during the purchase, sale, or transfer of property can result in costly and time-consuming errors.
Asset Protection Benefits of the Limited Partnership
Limited Partnerships offer liability protections similar to the LLC, but without the costs. On the U.S. side they are treated just like an LLC for asset protection and for financing purposes. Some of the internal paperwork is different, but that’s it.
Under Canadian law, the Limited Partnership is treated as if it is just you (the individual) purchasing the property.
“When you establish a domestic (U.S. based) Limited Partnership structure in the state where you’re going to buy the assets, then purchase the assets, they will be held inside of that Limited Partnership structure,” Scott says.
This gives you a structure to purchase your property through in a way that protects your American-based assets and minimizes your tax responsibilities.
“The goal of my firm is always to put our clients in a position that makes it look like they own nothing on paper," Scott explains.
That's why the best asset protection strategies make Canadian real estate investors unattractive targets for litigious lawyers.
“And if you are sued, you lose little to nothing because of the protection and the structures are there to minimize damage.”
Tax Benefits of the Limited Partnership
You need to know how the U.S. and Canadian governments will tax your business. Canada’s income taxes can be high, but the Limited Partnership agreement helps you manage real estate profits in a tax-friendly manner.
Limited Partnership income can be “passed through” and reported on your personal income tax return. While the LLC qualifies for pass-through treatment in the American tax system, Canadian laws treat the LLC differently. Corporate taxes apply to LLCs in Canada! As a result, the taxes are often too high for most investors to justify when a Limited Partnership can accomplish similar goals.
Scott helps Canadian investors and their families with wealth-building strategies that include asset protection and tax savings. These strategies may include using a business structure that has a separate entity status for Canadian taxation (C Corp, S Corp, LLC, etc).
Remember: In Canada, an American LLC alone would be taxed as a foreign corporation.
“So if you use LLC, C Corps, S Corps etc, Canada actually makes you pay a corporate tax,” Scott explains. “This is true even if it’s just you as a solo individual. That’s one way the Canadian tax law is different.”
How To Get Started
You’re a first-time Canadian investor in the U.S. Where do you start?
We’ve found that our friends in Canada want one source to help them on every step along the way. A lot of investors want to work with turnkey providers. They want coaching, preferred vendors, and connections to people who can help with their U.S. investments. A coach will help you clarify your situation. Goals and tactics from books and websites are great, but you need to know something beyond “I want to invest in apartment complexes.”
Royal Legal gives you access to a network of other investors and to turnkey professionals, including tax and accounting specialists who understand Canadian investing issues. You’ll have a team that can break down the numbers you need to hit to reach financial freedom. When you partner with Royal Legal Solutions, you will have some of the industry’s finest attorneys and CPAs on your personal real estate dream team.
Start with our investor quiz and we’ll help you get started. Royal Legal Solutions has years of experience creating Limited Partnerships. We stay current on state laws regarding these matters. We maintain relationships with CPAs licensed to practice in both the United States and Canada.
As investors ourselves, we take pride in setting you up for investment success. There is no good reason to take unnecessary risks with your hard-earned assets.
Asset Protection Structures For Canadians Investing In U.S. Real Estate
There’s another Gold Rush happening in the United States real estate market, and Canadian investors are getting in on the action.
Joe Biden’s $1.9 trillion coronavirus relief package in March (which followed relief packages going back to the start of the pandemic) gave Americans a bit of relief, and many of them put the extra money directly into savings.
“There's an opportunity like never before in real estate, and it's all artificially created because of the stimulus,” says Scott Smith, head attorney at Royal Legal Solutions. “Savings rates are higher than they've ever been, so once the coronavirus scare is over and people are back to work and businesses are working again, people are going to be less afraid. They're going to spend, which means that we should expect a rapid influx of money over the course of about a year.”
So how do Canadian investors take advantage of this real estate Gold Rush? How do you start acquiring the right assets AND make sure that you’re protected so you don’t lose them in a lawsuit?
Scott recently discussed these issues with Canadian real estate investing coach David Dubeau and Lauren A. Cohen, a cross-border strategist experienced in both law and real estate who founded e-Council Global. Before you go, check out our article based on her Eight Steps to Successful Real Estate Investment Across Borders. You may also be interested in How Limited Partnerships Protect Canadians Investing in the United States.
Set Up Your Investing Structure The Right Way
There's a lot of opportunity awaiting Canadian investors in the U.S. real estate market. But before you can take advantage, you need to understand that it’s a different game in the U.S. You'll need to establish the proper legal framework to do business safely and profitably.
“I've heard of different nightmare scenarios where Canadian investors bought properties in the States and they weren't set up properly,” Lauren says. “And they either got double taxed or they got sued. They lost a ton of money.”
“As you might know, the United States is a very litigious country,” Scott adds. “We have unlimited liability here, which means that a single lawsuit can go after as much money as they want.”
Insurance is a component of asset protection, but proper corporate entity structuring is an often-overlooked aspect as well.
“Entity structuring is important because you can’t simply hope that the insurance company pays out. We know that insurance companies are profit-seeking corporations and that we can't rely on them to do the right thing, especially when claims get very expensive. That's why we use asset protection tools—to cap our losses,” Scott says. “Even in the worst case scenario we know we're going to be okay.”
Anonymity is your friend.
How Anonymity Protects You
“The goal of my firm is always to put our clients in a position that makes it look like they own nothing on paper," Scott explains. "People that don't look like they own anything don't get sued."
That's why the best asset protection strategies make Canadian real estate investors unattractive targets for litigious lawyers.
“And if you are sued, you lose little to nothing because of the protection and the structures are there to minimize damage.”
How The Structure Works
So … What are we looking for when we're building an asset protection structure?
You aren’t going to rely on an LLC, because LLCs in Canada are taxed at a corporate tax rate. Instead, you’ll use an entity called a Limited Partnership . The Limited Partnership offers unique asset protection benefits to Canadian real estate investors with assets in the United States. It protects your American-based assets while minimizing your tax responsibilities.
You can own this Limited Partnership (and all the assets underneath it) anonymously. Remember: People who look like they don't own anything don't get sued, so that’s your first line of defense.
Adding Land Trusts To Your Strategy
The next part of a secure asset protection structure is the “secret sauce” for Canadian investors, because it will help you acquire assets with the best financing you can get.
A Land Trust will let you own the property anonymously. It also allows us to avoid something called the due on sale clause.
“This means you can actually buy the asset with the absolute best financing and then you can transfer it into the Land Trust and you don't have to worry about the bank having a problem with you transferring the asset because a Land Trust will avoid the due on sale clause of your mortgage.”
This is a huge cost saving measure for Canadian investors.
Holding the property underneath the Land Trust gives you access to better financing rates. Because the property is actually owned by (for example) “123 Main Street Trust” (according to the deed records), no one can get more information about that trust because everything about that trust relates back to a law firm an attorney—and all that information is protected by attorney-client privilege.
What if they sue the property anyway? What if grandma got hurt on the stairs and they're blaming you? They sue the Land Trust. And the liability there is blocked by the Limited Partnership.
"This means they're not able to to go after you personally," Scott explains. "Any of your personal assets or other assets are protected. The only thing that they'd be able to go after is just the one asset held in the Land Trust because the limited partnership structure is what caps it and stops it from being able to go after anything else.
In a Limited Partnership structure you (the Canadian investor) are the limited partner. The partnership also has a general partner—this will be an LLC or a C Corporation.
“Inside of a limited partnership, only the general partner is liable for actions taken—not the limited partners. That means that all of the income and all of the benefits flow to you as a limited partner. You don't have to pay any of the extra tax, but you get all of the protection of the limited partnership. If there's any liability, it’s going to be held by the LLC or C Corp—which don’t own anything.
There are worst-case scenarios they can attack an entity, but the only thing they're going to be able to attack here is an entity that doesn't own any assets.
What About Taxes?
The LLC is a great investment vehicle in the United States because it qualifies for pass-through treatment in the American tax system. However, Canadian laws treat the LLC differently. Corporate taxes apply to LLCs in Canada. As a result, the taxes are often too high for most investors to justify …. Unless they have a Limited Partnership.
Income taxes within Canada can be high, but the Limited Partnership agreement allows investors to gain liability protections while managing these profits in a tax-friendly manner. Of course, to reap these benefits, the LP must be properly constructed.
The Limited Partnership is a flow-through entity, so all income is taxed at the individual level. Income is also subject to U.S. federal income tax at the top marginal tax rate (currently 37%).
You will also be subject to Canadian taxation. However, thanks to the income tax treaty between the two countries, the U.S. tax paid counts as a foreign tax credit in Canada. This means the combined U.S. and Canadian tax on income on your real estate business would be 53.53% for (for example) an Ontario resident, since that is the top marginal tax rate in that province.
At Royal Legal, we hate corporate tax rates. The cool thing about Limited Partnerships is that they provide the exact same protections that an LLC does, but you don't get hit with corporate tax rates. All of the money flows from the investment property, to the Limited Partnership, then to you. The money never touches the LLC or C Corp.
“So for tax purposes all of the money is treated as a disregarded entity or a pass-through entity; the money never touches an LLC but all of the liability will rest inside of the LLC or C Corp.
You may acquire assets directly in the name of the Limited Partnership. However, some of Scott’s Canadian clients can get better financing rates if they acquire the asset inside of their personal name first.
“That's not a problem either,” Scott says. “You can just acquire that asset inside of your personal name, then create the Land Trust. Next, you’ll create a warranty deed to transfer the asset it into the Land Trust so then it's now held by the Limited Partnership.”
No matter what type of financing or what type of asset you’re working with, you're going to be able to find the way to hold that asset anonymously, in a way that's protected. You're also going to be able to always be able to take advantage of the best possible financing and have the best possible tax advantages.
Frequently Asked Questions
How will My Assets Be Protected if I partner with other Canadian investors to buy Property In the States?
You will designate all the investors taking part inside of your Limited Partnership documents. Is there one person or multiple people? Each of them should probably have independent advice as well just to make sure that their structures are set up properly.
If it's just a few people (your friends and family, for example), you're typically never going to have a problem.
If there's any type of fund arrangement, you may need to consult a U.S.-based securities/SEC attorney.
How do Canadians avoid double taxation?
“The best way to make sure that you're not double taxed is to be very clear about where your residence is,” Lauren says.
Treaty Investor (E-2) visas are for citizens of countries with which the United States maintains treaties of commerce. The visa gives you, the private investor, the flexibility to invest across the border without moving.
“If you do have an E-2 visa you need to keep track of exactly where you are at any given time. I will not work with anybody that does not get cross-border tax guidance—no matter what country they're from. Whether you're immigrating or not you need that cross-border tax guidance.”
There's a lot of people licensed in Canada to help people with U.S. immigration or U.S. investing. But you still need a U.S. contact.
“I have colleagues on my team that are licensed in the U.S. and Canada, so they're tax experts on both sides of the border,” Lauren says. “To me that's the best way to go because it's seamless.”
At the end of the day, the Limited Partnership structure is the ideal structure to avoid and minimize your taxes.
Is the LP/Land Trust taxed by the CRA as foreign income?
“The CRA will tax the entity," Laura says. "That's why the structure is so important because if you set it up this way your tax liability is going to be minimized. But this is definitely a question for your tax advisor."
What about owning multiple properties? Should investors repeat the structure for each property?
“Typically what we want to do is hold no more than $500,000 in equity in any one Limited Partnership structure,” Scott advises. “If we're underneath that threshold (assuming all these assets are inside of the same state), then what we'll do is we'll just create additional Land Trusts and hold additional properties underneath the additional Land Trusts.”
If an investor faces a lawsuit against one asset inside of one Limited Partnership, the litigant can target all of the assets held there. This is why we cap the amount of equity at $500,000.
“If you're risk averse, you can lower this $500,000 threshold and hold fewer properties in the LP. Or if you're buying multiple assets in different states, you do one Limited Partnership per state”
What does the Limited Partnership structure cost? Along with the LLCs, they can cost between $4,500 to $12,000. On the Canadian side of things you have to consider the taxes as a primary concern because the taxes will always outweigh the costs of additional structuring.
Does Limited Partnership mean passive or active investing?
Limited Partnerships are a type of entity structure that allow you to own active investments (flipping for example). It can also allow passive investments (for example, single family homes that you’re leasing out and typically holding those for more than a year).
A limited partner in a Limited Partnership is a passive member; the general partner is the active component of the partnership. The “active” component in U.S. litigation is the one that bears all the liability.
Canadian investors need an active business to qualify for a visa. So when you’re investing in U.S. real estate, you have to figure out how to turn what's otherwise looked at as a passive investment into an active business. Each individual business needs to be actively involved and needs boots on the ground.
You need to be at least 50 percent owner in the company. You could create an investment company that could invest in different assets. But you have to show that you have boots on the ground, even if all you're really doing is acting as an equity partner.
Does The Limited Partnership/LLC Structure Work For Every State?
Yes! Remember, it’s the tax implications on the Canadian side we’re worried about here. Again, the taxes will always outweigh the costs of additional structuring.
“If you end up becoming a U.S. resident then we can modify accordingly,” Lauren explains. But remember, getting a non-immigrant visa (which is one of the most common ways that Canadians access the U.S. market) does not require you to live in the U.S. You won’t necessarily become a U.S. taxpayer.
“But you have that flexibility to get a U.S. Social Security number, open a U.S. bank account, and build U.S. credit so there's a lot of advantages to getting this visa and as you're building your net worth and your portfolio in the U.S. it's it's it could be really advantageous.”
What is actually sold when you sell a property? The actual property or an entity?
You're almost always selling the asset out of your entity because your entity actually has other things that are valuable in it. The entity will have the bank account and the credit history—things you'll want to retain even when you dispose a property. On the U.S. side of things, that allows you to be able to get access to business lines of credit after a year to two years.
Unless there's a good tax reason to sell the entity, you're almost always going to sell the asset and hold on to your entity.
Do I Need an American tax I.D. to invest in the States?
No.
Is this legal?
You might be thinking this is too good to be true, and that’s exactly what you should feel when looking at advanced strategies.
“You're always going to think that when you're working with high-level professionals who are blowing your mind about what is actually possible and what best practices look like,” Scott says.
“This is all on the up-and-up. These are the best practices that we do for liability and tax protection at Royal Legal Solutions, and we've been doing it for over five years for over 2,000 investors.”
Conclusion
Royal Legal Solutions is on a mission to help people find financial freedom. Take our investor quiz and see how we can help you achieve your goals in U.S. real estate or wherever your path takes you. As investors ourselves, we take pride in setting you up for investment success. There is no good reason to take unnecessary risks with your hard-earned assets.
Articles of Incorporation Vs. Operating Agreement: What's The Difference?
When you're starting a business, you have to think about the boring stuff.
There are legal decisions to make. There are forms to complete. Although the paperwork can seem overwhelming, these documents are essential to keeping your operation running smoothly.
One of the common questions new small business owners have concerns articles of information vs. operating agreements. What’s the difference?
Articles of incorporation and operating agreements both outline the structure of a business and define its ownership. But each of these documents serves a unique purpose, and small business owners and real estate investors often mix them up or think they are the same thing.
To help you understand which document you need for your business—or if you need both—we'll examine the characteristics of each one, including their similarities and their differences. Don't be bored ... Getting this right on the first try will increase your chance of success down the road.
Bored? Don't be. A profitable business is exciting!
What are articles of incorporation?
Articles of incorporation (also called a corporate charter or a certificate of incorporation) is a set of legal documents that establishes a corporation in the eyes of the state. These documents, which are typically filed with the secretary of state, give the business owner asset protection by separating personal assets from the business assets.
The information included in your articles of incorporation can vary according to the nature of your business and your state's requirements. However, these documents generally include the following elements:
Legal name and address of the business
Date business was established
Business purpose
Business bylaws
Names of the business owners
Name and address of the registered agent
What share of ownership can be held by investors
What restrictions are placed on business activities
If you are filing for incorporation as an LLC, you are not legally required to have articles of incorporation. However, if your business is an S or C corporation, you must file these documents with your state.
What is an operating agreement?
An operating agreement is a legal document that establishes internal operating procedures and defines the business relationship between the members (owners) of a limited liability company (LLC). All LLCs with two or more members should have an operating agreement to protect the business' LLC status, clarify verbal agreements in writing, and legally protect the agreement in the eyes of your state.
The succession plan if an owner exits or an unexpected issue occurs with an owner
How managers are appointed, their responsibilities, and obligations
How members vote on important issues
How the transfer of ownership occurs
How profits, losses, and distributions are handled
How records are maintained
Other information members feel is necessary
Although not all states require Series LLC operating agreements, legal experts recommend having a written agreement (or bylaws) that outlines your business operations. In addition to helping your business run more smoothly, some financial institutions will require corporate bylaws before you can open an account or get a loan.
How do articles of incorporation and operating agreements differ?
One way to look at the difference between these two legal documents is that articles of incorporation define a business as a corporation with the state, while an operating agreement defines how the business owners relate to each other. Therefore, the first one is a public document, while the second is more for internal use.
Another difference is operating agreements are often less formal than articles of incorporation and therefore are usually easier to update and adjust as the organization changes and grows.
How are articles of incorporation and operating agreements similar?
Articles of incorporation and operating agreements both outline your business structure and share some similar features. Both documents contain basic business information, such as its name, purpose, management structure, and how it will operate.
Another thing the documents have in common is that they both can contribute to the successful operation of a small business.
How do you write articles of incorporation or an operating agreement?
Both articles of incorporation and operating agreements require wording that is specific to your business, your state's requirements, and your type of operation. Vague or general verbiage can create problems down the road.
For example, here are some problems to guard against in your legal documents:
Not defining decision-making powers. Be sure to specify what decisions need to be unanimous among the members and which ones can be made by a majority. Also, clarify what constitutes a majority.
Not being specific on manager selection. Use precise language on how managers are elected or removed. If voting occurs, spell out who is eligible to vote on managers.
Not keeping the manager's powers in check. Spell out the exact duties of the manager to prevent possible abuse of power. Clearly state how and when company assets may be sold, including when a vote is needed on these decisions.
An experienced legal professional can answer questions and provide help with operating agreements or articles of incorporation. The bottom line is that while these documents can be a headache to prepare when you are launching your new business, you will be glad later that you took the time to do them right.
Also known as a certificate of existence or a certificate of authorization, a Certificate of Good Standing is a vital document for any business. Without one, you’re going to have a tough time.
There’s a framework of regulations aimed at ensuring companies meet certain minimum standards before transacting business. For the most part, business owners and real estate investors agree on the need for a system that helps distinguish legitimate enterprises from unknown entities.
Essentially, the Certificate of Good Standing means you’re legally cleared to do business in your state.
What is meant by Good Standing?
A Certificate of Good Standing—also known as a Certificate of Existence or a Certificate of Authorization— shows that your business has paid its taxes, has fully complied with various regulations in the state where your entity was formed, and has filed an annual report.
This vital document is essential to just about any business because it means you’re legally cleared to do business in your state. Keep in mind, laws vary from state to state regarding the types of businesses that must register. If you’re unsure about your specific situation, check with your state’s business filing agency.
When would I need a Certificate of Good Standing?
There are many specific occasions where you will need to produce a Certificate of Good Standing. These can include if you choose to expand your business into another state (or even country), or if you are bringing a new investor or partner on board.
Obtaining it in advance will help you avoid last-minute scrambles, since you may also be asked to provide a copy when setting up contracts with suppliers, bidding on government contracts, and registering to do business in another state.
Who would require a Certificate of Good Standing?
Having a Certificate of Good Standing is necessary when opening a business checking account, applying for a loan, raising capital, or raising funds from investors. Many more lenders will require them if you need to apply for any type of financing.
Obtaining it in advance will help you avoid last-minute scrambles, since you may also be asked to provide a copy when setting up contracts with suppliers, bidding on government contracts, and registering to do business in another state.
AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE
Regardless of your situation, it’s just sound business practice to have a copy of your Certificate of Good Standing for your own records. You’ll probably need it to operate anyway, and you’ll want to be able to produce it easily. Royal Legal Solutions can help you meet the requirements for and obtain your Certificate today.
WHY USE ROYAL LEGAL SOLUTIONS FOR A REAL ESTATE INVESTMENT ASSET PROTECTION?
We have experience in setting up the proper asset protection and making it easy for an investor to use. Our system simplifies management structure as much as possible, and we also use common sense to ensure your needs are met. For example, just one tip we give our clients is that you don’t need multiple bank accounts as long as you have accurate accounting records. For taxation, they should stay exactly how they are now while being reported on a Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners).
Assignment of Interest for Real Estate Investors
If you own an LLC or Series LLC, chances are that you may need to handle an Assignment of Interest.
There are a wide variety of situations where assigning all or part of the interest of a company can benefit the business as a whole. How this process looks is governed by state law as well as the Articles of Organization for your particular LLC. Some common reasons you may need an Assignment of Interest include the below scenarios.
Lending Negotiations
Sometimes members of an LLC will use their shares of the company as collateral for a loan. This is a fairly common practice in the real estate industry. Members may assign all or merely a portion of their interest in this situation.
Debt Resolution
Forming companies and purchasing properties is expensive. Occasionally, members of an LLC may assign a portion of their interest in a company until their profits have satisfied a personal debt.
Personal Reasons
There is a wide range of reasons you may choose to assign your interest in your company to a trusted partner or family member. Marriage, death, or other major life events can raise this issue.
Royal Legal Solutions Can Assist You With Many Assignment Of Interest Needs
If your Assignment of Interest is part of a greater issue with forming or managing your Traditional LLC or Series LLC, Royal Legal Solutions can assist you. We have years of experience forming these companies and managing the necessary paperwork. We also offer free educational resources on the best practices for corporate management, taxes, and asset protection. Our belief that informed clients are the best kind of clients drives us to offer regularly updated, accurate free materials to help you get the most out of your professional LLC. Forming your LLC with Royal Legal Solutions can simplify the process of assigning interest, as we will be the ones to draft your Articles of Organization. If you know this will be a concern for you, be certain that you advise the professional you work with of your situation when forming your LLC.
What Exactly Is An Assignment Of Interest?
An Assignment of Interest is the legal means for transferring the ownership of an LLC or other Company is from one entity to another. Typically, there are additional complications regarding under what conditions and what approvals are necessary in order to enforce the assignment. These conditions and approvals are located in the Subscription or Operating Agreement of the investment.
Why You Should Choose Royal Legal Solutions For Your Assignment Of Interest
BEWARE OF “FREE” ONLINE TEMPLATES
One mistake that some investors fall for is attempting to draft their own contracts or pulling them from free online services.
Perhaps you have seen that you can get certain templates for legal documents, including Assignments of Interest, from Legalzoom or another website. Any attorney will caution you against using these for your business. Ultimately, these “free” documents can cost you a great deal of money in the end.
Anyone can write something and give it away on the internet. So that document may have been penned by an attorney who makes $1500 an hour, or it may have been a school exercise for a student who does not speak English as a first language.
Frankly, it is impossible to know the source of such documents and they should be regarded with suspicion. Only an attorney with experience in the real estate field can tell you whether such a document would hold up under legal scrutiny. In fact, we have been called after clients of ours have made this mistake. Trying to correct errors in legal documents after the fact is infinitely more difficult, time-consuming, and costly to the client than hiring a professional to handle the document in the first place.
It is well worth the investment to ensure that your Assignment of Interest and other legal documents are properly drafted by professionals.
Our Experienced Legal Professionals Advocate For You
When you get your Assignment of Interest from Royal Legal Solutions, you do not have to live with these anxieties. You can rest assured that your document does exactly what it needs to do, and will protect your best interests.
We know you take your real estate business seriously, that you have invested a great deal of your hard-earned money into growing your investments. Royal Legal Solutions specializes in customizing the necessary legal documents and seamlessly obtaining the approvals to transfer the ownership interests for your LLC. If any of these steps are done incorrectly, the transfer will be invalid.
The good news is that we are here so that you do not have to take this unnecessary risk. Simply tell us what you need. Let us worry about how to get it done, while you do what you do best: run your real estate business.
Why We Assist Real Estate LLC Owners With Assignment Of Interest
Whatever your reasons are for needing an Assignment of Interest, Royal Legal Solutions can assist you. We can also help with other operational or legal aspects of your corporate structure if you have additional questions or needs regarding your Traditional LLC or Series LLC.
Having an actual real estate attorney draft your LLC’s documents can make the difference between whether they will hold up in court if you ever come under attack. Smart investors don’t have to take this risk. With Royal Legal Solutions by your side, you can feel secure in the fact that your business documents are legally compliant and accomplish exactly what you need them to.
Why Use Royal Legal Solutions For A Real Estate Investment Asset Protection?
We have experience in setting up the proper asset protection and making it easy for an investor to use. Our system simplifies management structure as much as possible, and we also use common sense to ensure your needs are met. For example, just one tip we give our clients is that you don’t need multiple bank accounts as long as you have accurate accounting records. For taxation, they should stay exactly how they are now while being reported on a Schedule E of your personal return (if you’re an individual/married partners) or a partnership return (if unmarried partners).
Filing for Incorporation: What To Know About Making Your Business Legit
Most serious real estate investors eventually consider filing for incorporation to make their business legit. While the process can be complicated, it’s well worth the effort to protect your assets through incorporation.
Before we dive into the nitty-gritty of starting a corporation, it’s important to keep in mind that incorporation is only one option for making your business "official" in the eyes of Uncle Sam and the IRS. Depending on the circumstances, you might find that it’s preferable to form an LLC or Series LLC to protect your assets.
I recommend consulting with my team or another attorney specializing in real estate investing to make sure you choose the most advantageous option for your situation. Check out our article on Series LLC Rules to find out more on that front.
What Does It Mean To Incorporate Your Company?
When you incorporate your business, you form a corporation, which is a legal entity that is separate from its owner. Corporations are taxed independently from their owners and can be held legally liable for corporate actions. A corporation’s profit is separate and distinct from its owners’ income.
Corporations are created by state statute, which means that each state has its own requirements and regulations by which corporations must abide.
The owners of corporations are usually referred to as “shareholders,” and there is no maximum number of shareholders that a corporation can have. In most states, shareholders can be individuals, LLCs, other corporations, and foreign entities. Most states also permit an individual to form a single-shareholder corporation.
How Much Does It Cost To Start A Corporation?
To start a corporation, you will usually have to cover four different types of costs. These fees include a filing fee paid to the Secretary of State, a first-year franchise tax prepayment, governmental filings fees, and attorney fees.
Depending on the state of incorporation, Secretary of State filing fees can be a flat fee, determined by the number of shares authorized or a combination of both. Secretary of State offices typically charge between $100 to $250 for filing fees.
Franchise taxes are required by some states to be paid for the privilege of doing business as a corporation in that state. Franchise fees usually range from $800 to $1,000, but some states do not require this tax to be paid.
What Documents Are Needed For Incorporation?
To incorporate your business, you’ll need to file a few different types of documents.
Articles of Incorporation
Articles of incorporation are the legal document that creates a new corporation. To start your corporation, you’ll need to file articles of incorporation with the appropriate entity in your state. In many states, you’ll file with the Secretary of State, but this can vary.
The required information for your articles of incorporation to include can differ between states, but most states require at least the following info:
Corporation name, address, and principal place of business
The business purpose of the corporation
Number of shares, if applicable
Class of shares, if applicable (common or preferred)
Names and addresses of the initial board of directors
The registered agent for the corporation
Name, address, and signature of the incorporator who fills out and files the form
Every state will charge a filing fee, which generally ranges from $100 to $500. Once the state entity processes the articles of incorporation, they will send you a certified copy that confirms that your corporation has been approved to do business in the state.
Articles of incorporation are only required if you are forming a corporation. If you decide to go with an LLC, you’ll need to file a similar document called articles of organization.
Corporate Bylaws
Corporations must also establish corporate bylaws, which determine how the company’s shareholders, officers, and directors will divide authority and management in the business. The bylaws will also outline how the day-to-day functioning of the corporation will operate.
People often confuse articles of incorporation and bylaws, but they serve entirely different functions. While the articles of incorporation establish the corporation’s foundation, bylaws are much more detailed and explain how the corporation will be run.
Tax Election Form
For many businesses, it may be advantageous to be taxed as an S-Corporation instead of a C-Corporation, as income from a C-Corp is taxed twice. Because corporations are separate taxable entities, your business will have to pay taxes on its profits, and then you’ll have to pay personal income taxes on the money you make from your business.
An S-Corporation, on the other hand, is what is known as a “pass-through” entity. Because S-Corps don’t have to pay their own taxes, all of your business profits are passed through to your personal income.
The default tax election for all new corporations is a C-Corp. This means if you do nothing, you’ll be taxed as a C-Corp. In order to be taxed like an S-Corp, you will need to file Form 2553, Election by a Small Business Corporation, with the IRS.
Can I Incorporate Without A Lawyer?
While it is possible to incorporate without a lawyer, it is not recommended. An experienced attorney can guide you through the decision-making process and ensure you pick the legal structure that best suits your business. A lawyer can also help you hide ownership of a company to maintain your anonymity.
You don't have to call us to get this done—but please call someone who knows the law.
How to Get an Employer Identification Number (EIN) for a Foreign Entity
If you’re interested in any of the following, you’ll need an an Employer Identification Number (EIN), also known as a Federal Tax Identification Number:
Opening a checking and savings account (or doing any kind of banking).
Opening a retirement account.
Hiring employees for your business.
The Internal Revenue Service issues IENs for corporations and partnerships to properly track their business activities for taxation and general monitoring. Here’s a full list of different types of businesses that are required to have an employer identification number.
Even if you’re a sole proprietorship, you still might want to get an EIN to protect your identity. You don’t want to go around handing out your social security number all the time, after all.
But what if you aren’t based in the US? Can you still get an EIN? If so, how do you get an EIN for a foreign entity?
Let's start with a basic question:
What is a foreign entity?
Before your business can operate in a state other than your home state, your corporation, LLC or other entity must qualify to “transact business” in that state, and is considered a foreign entity.
In general terms, any business entity not incorporated in your home state is considered a “foreign entity." A Series LLC in California is a "foreign entity" in Texas. For the purposes of this article, however, we're talking about an actual overseas business entity—not a business based in another state.
Previously established out-of-state businesses have typically already registered for an EIN from the IRS, so that California SLLC won't need a new EIN to transact business in Texas.
How to Apply for an EIN for a Foreign Entity
Quick and easy answer: review the information below, fill out the SS-4, and then call the international EIN helpline for the IRS at 267-941-1099 (which is not toll free).
To get an EIN as a foreign entity, you need to fill out Form SS-4, aptly titled, “Application for Employer Identification Number.” (The IRS’s internet EIN application is their “preferred method” for applying for most entities looking for an EIN, so if you stumbled upon this page and you’re not a foreign entity, start there). With that said, however, for international applicants, the IRS recommends calling the following non-toll-free number: 267-941-1099.
To do so, you’ll need the following information, at a minimum:
Legal name and address of the business
The type of business entity
Reasoning for applying for an EIN
The name of the country (or state) where the entity is incorporated
How many employees it has (or is expected to have in one year)
The industry of the business
Some basic accounting information
If you’re filling out the form online, make sure to follow the instructions very carefully to make sure the process is as smooth as possible.
Tips to Make Sure Your EIN is Approved
You’re only eligible to apply for an EIN online if you meet certain criteria:
The business needs to be located in the US or in US territories.
The person applying has a valid taxpayer identification number (like a social security number from the social security administration or an individual taxpayer identification number)
Complete the online application in one session.
If you don’t meet those criteria, call the number at 267-941-1099.
Have all of the required information ready before calling the IRS.
Only file once per day. This is important if you have multiple trusts set up for different properties.
Double-check that your information is correct.
Why Do You Want to Apply for An EIN Even If You Don’t Have To?
Why might you want to apply for an EIN even if you’re, let’s say, a sole proprietorship?
There are a few reasons, and we touched on some of them in the intro, but we’d like to go over them for good measure here—as well as add some more:
An EIN allows you to file business taxes and avoid tax penalties.
There are certain tax breaks that are only available for businesses. Take, for example, the PPP loans as part of the pandemic. Many of them were even forgiven, so they were essentially grants for certain businesses.
An EIN can protect your Social Security Number.
Occasionally you might have to fill out forms for your business. If you have an EIN, you no longer have to use your more sensitive personal information to fill out those forms.
An EIN opens up a variety of business accounting options.
With a foreign EIN, business loans and business savings accounts are options for you to consider.
An EIN speeds up pretty much everything related to running a business.
With an EIN, you can more easily do everything you need to run a business, and if you’re a foreign entrepreneur, it lends you that much more credibility to US businesses and workers.
The Takeaway
A foreign entity EIN can have benefits, as we've seen. In order to get an Employer Identification Number for a Foreign Entity, you should look over Form SS-4 from the IRS, prepare all of the information you’ll need, and then call 267-941-1099. If you fill out the application online, your business needs to be located in the US or any US territories.
Which Type of Business Entity Needs an Employer Identification Number (EIN)?
Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).
The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.
Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account.
Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.
Business Entities that Do Require an EIN
C Corporations: C corporations are those considered to be your “standard” ones. These entities are required to file a Form 1120 (Corporate Tax Return) and pay corporate-level taxes.
S Corporations: S corporations, defined by Subchapter S of the Internal Revenue Code, are pass-through entities. S corporations are required to have an EIN, but they file a Form 1120S (Informal Federal Return). Unlike the C corporations, any profits or losses incurred by the S corporation are filed along with the owner’s personal returns.
General Partnerships: General partnerships are required to have an EIN for taxation purposes. In a general partnership, all partners must report profits and losses on a Schedule K-1 on their personal income taxes.
Limited Partnerships: For taxation purposes, a limited partnership operates much the same as a general one and will need an EIN. A limited partnership typically has a general partner who manages the business and limited partners who act more as investors. The general partner must file a Return of Partnership Income Form 1065 that includes any losses, profits, and distributions issues to the limited partners. The other partners will then receive their Schedule K-1 from the general partner.
Multi-Member LLCs: The IRS treats multi-member limited liability companies (LLCs) much as they do a partnership. The LLC must submit a Form 1065; a Schedule K-1 with any allocated distributions must also be filed. Members will also be required to file a Form 1040 for their share of the LLC as well. This is true whether the LLC hires employees or not.
LLCs Taxed as Corporations: As with C and S corporations, if you opt to have your LLC taxed as a corporation, you must obtain an EIN.
Single Member LLCs with Employees: If you plan on hiring employees within 12 months, or already have employees, your LLC must have an EIN. The IRS may provide you with two EINs, however. Any employment taxes that are paid, must be reported through the use of an LLC-specific EIN. However, any finances passed to an LLC member must be reported under a member EIN instead.
Sole-Proprietorships with Employees: As with the LLC with employees, a sole-proprietor who hires employees with need to obtain and EIN too.
Business Entities that Do Not Require an EIN
Single-Member LLCs without Employees: Most single-member LLCs that do not hire employees will not need to obtain an EIN. A personal social security number (SSN) will suffice. However, if the LLC has a Keogh plan or transports anything that will incur a federal excise tax, an EIN will likely be needed.
Sole-Proprietorships without Employees: Sole proprietorships without employees can use their SSN as well. It is important to remember, however, that some lenders may not provide a loan without an EIN.
Business Taxes
The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.
Should rental property be in an LLC or trust? Unfortunately, the answer is not as straightforward as you might think.
Whether you’re planning your will or setting up a company to manage your growing real estate portfolio, you need to know exactly what type of entity you should use to shield your properties from legal trouble. If you make the wrong decision, you could potentially expose your holdings to unnecessary risk, costing you hundreds of thousands of dollars down the road (or, at the very least, giving you a big headache).
So, first, let’s start with a basic definition of "LLC" and "Trust" as they apply to real estate investing.
(If you just want the pros and cons of each option, feel free to scroll down to the bottom of this article).
It’s one of the most popular legal entities that a person can set up to operate their business. You don’t need any employees or a board of directors, and you can use it to separate your business assets from your personal finances. That way, if you ever find yourself on the losing side of a lawsuit, the only assets you’ll be forced to give up are those assets held within the LLC (in this case, your rental properties).
If someone sues you and wins, they can’t take away your personally-owned assets (like your car, primary residence, and your kid’s college fund).
Sounds like a pretty sweet deal, right? You could theoretically make some risky moves with the assets you put under an LLC and then dissolve that LLC in case you get into any trouble. The only risk is the asset, right?
Well, not so fast. There are some instances when your personal assets might be at risk, and you definitely shouldn’t start an LLC for the sole purpose of doing something nefarious.
When Does an LLC Fail to Protect Your Personal Assets from Lawsuits?
There are a few instances when, if you use an LLC to hold your rental properties, you’d be putting both your rental properties and personal belongings at risk. Those instances include:
You make a personal guarantee on a debt. When you sign a contract for certain loans, including, in some cases, mortgages and home equity loans, you might have to make a personal guarantee to pay it back. That means that you’re on the hook to pay down the debt even if your business doesn’t perform. Lenders will often require you to make a personal guarantee if your LLC doesn’t have a long-established credit history or cash flow.
You sign a contract with your name, rather than your title with the LLC. Always sign contracts as “John Doe, CEO of Rental Properties LLC,” never just “John Doe.”
You mix up your personal finances with your business finances, or you fail to observe the requirements of your LLC in your state. Keep separate bank accounts and credit cards for your business and personal finances. As soon as you use your business credit card to buy groceries, a lawyer is going to make the argument that you’re using your LLC to protect your personal assets.
Furthermore, an LLC can create a kind of avalanche effect. As soon as one property is attacked under an LLC that holds multiple rental properties, your entire portfolio can take a hit.
Why Use a Trust to Hold Your Rental Properties?
You’ve probably heard about trusts as they relate to estate planning. By putting certain assets in a trust, you can guarantee exactly how and when they’re distributed. This way you can avoid a solid chunk of estate taxes, since the assets in a trust aren’t considered your personal property, or even protect your assets from heirs that are likely to mismanage them.
One solution is putting all of your properties under separate trusts. There are a few different types of trusts: revocable, irrevocable, pay-on-death (POD), and living trusts. For our purposes, we’re just going to focus on revocable and irrevocable trusts.
Revocable trusts allow you to control the assets during your lifetime. These are still considered personal assets, and they’ll be included in your estate taxes.
Irrevocable trusts transfer legal ownership to a trustee, who then oversees the exact details of how the asset should be treated according to the trustors’ will. Since this is no longer technically part of the trustor’s property, it isn’t considered in estate taxes.
What are the Benefits to Using a Trust Versus an LLC?
Just like an LLC, putting your property in a trust can separate your personal assets from your business, so that if you run into legal trouble, you won’t have to forfeit your personal belongings.
It can cut down on estate taxes.
It can distribute liability. If you set up an LLC, you’ll definitely need to buy liability insurance on top of it. Even then, you could potentially lose all of your properties in a single lawsuit. If you put the properties in individual trusts, you spread out that liability.
Should You Put Rental Property in an LLC or Trust?
So, to review, what are the pros and cons of each option?
Putting Rental Property in an LLC Pros
One of the most popular ways to form a corporation. Therefore, it should be easy to file the requisite paperwork and even find guides online to help you with the specifics.
Separates your personal assets from your business assets.
Putting Rental Property in an LLC Cons
You could potentially lose all of your properties in a single lawsuit.
If you don’t follow the requirements for incorporating an LLC (like holding annual meetings and keeping your personal finances completely separate from your business finances), you could open up a lawyer to “pierce the corporate veil.” If this happens, they’ll be able to prove that you’re just using the LLC as a protection from liability while treating it like personal property.
In short, you could open up not only your rental property to potential issues, but your personal property as well.
Putting Rental Property in a Trust Pros
Effectively separate your personal property from your business assets.
By putting each property in its own trust, you can disperse liability.
Putting Rental Property in a Trust Cons
Might require more time and resources.
Less straightforward than simply setting up an LLC.
How To Start A Shell Company
Why risk exposing yourself (and your assets)?
A shell company can streamline your real estate investments while minimizing this exposure.
Your shell company is your face to the world, it’s the one that we want people to come after if there’s ever a lawsuit. Think of it as a legal decoy. It shouldn't offer products or services, hire employees, or generate revenue.
Most investors find the Traditional LLC works just fine for a shell company to perform real estate functions like collecting rent, paying property management, etc. But you’ll also need an asset-holding company for your properties. We recommend the Series LLC if you’ve got more than one property—it's a cost-effective, scalable way to compartmentalize your assets.
When it comes time to set up your asset protection plan, always think: assets on one hand; complete anonymity, separation and operations on the other. The Series LLC is your asset-holding company; your shell company handles operations.
Why Start A Shell Company?
Shell companies are used by large public corporations and everyday mom-and-pop investors. Beyond compartmentalizing assets to help fend off potential lawsuits, shell companies serve a number of other purposes. These include:
Temporarily holding assets or funds
Investing abroad
Protecting assets
Securing better financing arrangements
Creating financial privacy
Hostile takeovers
Access to different real estate markets
Shell companies can give real estate investors access to different kinds of financing and can provide access to jurisdictions with friendlier tax rules. They may also help with a few other niche paperwork challenges. Those kinds of shell companies are sometimes referred to as “mailbox companies” or “letter-box corporations."
One of the biggest advantages of shell companies is that they can be made to be anonymous. It all comes down to knowing how to hide ownership of a company.
You can mask ownership of a shell company by hiring a nominee director to file the paperwork under their own name. This is a simple and highly recommended step if your goal is privacy. You will maintain actual ownership of the company, but their name will appear on all company records.
If you want to take anonymity one step further, you can have the shell company registered as a subsidiary of another shell company. The repeated layering of shell companies can become a hassle, but it will certainly provide greater anonymity and protection.
What You Need To Start A Shell Company
Going offshore to start your own shell company isn’t as hard as you may think. You will typically need to provide:
Applicable fees
Articles of association/incorporation
ID (normally a passport)
Proof of residence
Registration forms
There may be additional items required in your shell company’s jurisdiction.
Shell companies can typically be registered online or by mail, or sometimes by phone. You will have to pay the necessary fees, which normally range from a few hundred to a few thousand dollars.
You may need someone to guide you through the process. Registered agents can help. They will file all the paperwork and send all the fees on behalf of your new company.
You will need to submit personal information to register your shell company. The registered agent and beneficial owner are the parties whose identity must be submitted.
Where To Start A Shell Company
There are many locations where you can set up your shell company. But some jurisdictions make it far easier than others. Some of the most popular locations are:
Bahamas
Bermuda
The British Virgin Islands
Cayman Islands
Luxembourg
Switzerland
USA (States with lax requirements and greater privacy protections)
Delaware
Nevada
Wyoming
Your choice of location may come with its own company naming restrictions. Make sure your company name is in line with local requirements. Note: public records in the Cayman Islands do not even reveal the names of a shell company’s registered agent.
Compliance and Ethical Considerations
There’s nothing inherently illegal about owning a shell company. There are also several great reasons to start one, as we’ve covered.
But shell companies have certainly been used for illegal activities, such as:
Money laundering
Illegal tax evasion
Illicit business activities
Hiding assets from a spouse during divorce proceedings (this may be considered fraud)
If you’re unsure whether a shell company is the right choice for you, it makes sense to talk to a lawyer. A lawyer can help you go over your options and ensure every step is completed in compliance with the law. That way you can quickly and safely have your exact needs met.
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