Do I Need A Registered Agent In Every State?

Real estate investors who use an LLC for business operations may wonder if they need a registered agent in every state where they have properties or transact business.

Sometimes, entrepreneurs choose a state other than their residence for forming an LLC, and different jurisdictions may have different rules about registered agents. Here is what the law says about registered agents and options you should know about.

Where Do You Need A Registered Agent?

The state laws are clear on where you should have a registered agent:

If you have formed an LLC in your home state and own only local properties, you need a registered agent only in the home state. You also can be your own registered agent—more on this later.
When you are doing business in multiple states, you may need to register your LLC in each state where it has significant business operations.
If the LLC is registered in any state other than your home state, you will need a registered agent in the state of registration and in other states where you operate.

Registered Agent In Your Home State

Those who form an LLC in their home state and invest only in local properties will need to have a registered agent only in the home state. In this situation, many real estate investors consider becoming their own registered agents, saving the annual service fees.

While becoming your own registered agent in your home state might seem a no-brainer, there are still things to consider. First, the registered agent must physically reside in the state of business formation. Secondly, the registered agent should be able to accept service of legal papers during regular business hours.

He or she is also responsible for all legal and tax filings. Last but not the least, the registered agent should disclose his or her address in all company documents, which may raise privacy concerns. Meanwhile, there are other options for a registered agent in your home state, as we'll see.

Registered Agents Where You Are Doing Business

Whether you have a traditional LLC with properties across several states or a Series LLC, you need to have a registered agent in every state where your company is doing business. Although it may sound clear at first sight, the tricky part of this requirement is what is considered as "doing business" in the state.

For example, the Texas Business Organizations Code doesn't provide any clarification of the meaning of "transacting business." Thus entrepreneurs and lawyers are left with a non-exhaustive list of what is not considered a business transaction. The confusion is similar in other states.

Meanwhile, those real estate investors who buy properties in other states and then flip them are considered as "doing business" in these states. Remember, you are required to have an LLC registered agent in each such state.

Registered Agents For Out-of-State LLCs

Some investors register their LLCs in business-friendly states such as Delaware, Nevada, Wyoming or Texas even if they reside in other states.

To do this, you'll need a registered agent at the place of LLC registration—you cannot even file the initial paperwork for your LLC without it. You should also have a registered agent in all other states where you conduct business.

What Happens If You Fail To Appoint A Registered Agent?

As you already know, there is no way to skip appointing a registered agent when forming an LLC. However, when buying or selling local properties in other states, you may be tempted to delay or totally skip appointing a registered agent in the state where you are now doing business.

This could lead to legal expenses, loss of limited liability protection, and even criminal charges. In Texas, a failure to appoint or maintain a registered agent (and registered office) may result in the closure of the business along with other liabilities.

The best solution is to have a registered agent immediately before your company initiates any business transaction in any state.

Registered Agent Services

As was already mentioned, you can be your own registered agent in your home state if you are comfortable with tax and legal filings, if you are ready to disclose your address to the public in company documents, and if you can receive legal papers during business hours (even when on vacation or sick).

If the above doesn't sound like a good fit, another option would be to hire a company offering registered agent services for a small fee, ranging from $45 to $75 per year. These companies offer a standard set of services, and many of them are present in multiple states.

Another alternative would be to hire a law firm offering registered agent services. A professional lawyer would not only act as your registered agent but will be able to assist with other aspects of company formation and compliance.

The Takeaway?

Now you know that not having a registered agent in the state where you do business can lead to high penalties and injunctions and even criminal prosecution.

There are numerous companies offering the services of professional registration agents for a small annual fee. It is even better to involve a professional attorney as your registered agent—he or she can assist with whatever legal issues may arise and ensure compliance across the board.

Maintain Your LLC Corporate Structure to Avoid Lawsuits

Why file an LLC and manage a company if it's going to get invalidated? Can't a good litigation attorney just "pierce the corporate veil" of an LLC?

That advice is just wrong. LLCs are incredibly hard to pierce—if they are maintained correctly. The problem is that most business owners fail to do the things that are necessary to maintain the adequate corporate structure.

So what are the things that you need to keep in mind about how to structure real estate investment company?

First, you must maintain records and accounting of your company. How much money is coming in? What is the money that's being spent? You need to run everything through a bank account for your company to maintain the appearance of being a legitimate, separate entity from yourself.

You can not treat the money of the company as it were your own piggy bank. This means if you ever need to take money out, you must keep an accounting of it as a dividend from the company.

If you fail to follow these steps, a corporation can get pierced. If the corporation is pierced it provides no protection.

However, if you are diligent in maintaining adequate records of the company you will be protected.

What is a Partnership Return?

The LLC or Series LLC has the easiest tax returns for a single member. It's a "pass through entity," which means all of the income from the company can be reported on your personal income tax return.

You don't have to pay thousands of dollars to a CPA to file a business return. Great news!

This is also true for your spouse filing jointly. This can make tax preparation a lot easier.

Some states have specific tax rules regarding multi-member LLCs. For example, if you and a partner have an LLC, you may need to file a partnership return. This is a separate return for the business itself. You need a good CPA who knows about real estate investing to help you make sure you're doing it right.

Also note: In some cases, an LLC can be taxed as a corporation. In some cases, it makes sense to have your LLC taxed as an S Corps.

Keep more of your money with a Royal Tax Review

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What’s The Difference Between An S Corporation & A C Corporation?

If you’re trying to set up a business to hold your real estate investments, all the jargon and legal mumbo jumbo can be confusing. For instance, the internet is probably telling you to decide if you want your business to be an “S” corporation” or a “C” corporation,” but you don’t even know the difference between an S Corp and a C Corp. So how are you supposed to decide?

Don’t worry—I’ve got your back. Think of this article as your starter guide to deciding how your business should be structured and taxed.

Before you can choose between an S Corp and a C Corp, you need to understand the basics of how businesses are classified.

There are two different levels of classification:

Legal structure
Tax status

First, you’ll need to choose the type of legal structure you want your business to have (corporation vs. LLC), and then you’ll select how you want to be taxed (S Corp vs. C Corp).

First Level of Business Classification — Legal Structure

State laws will control the process of forming a corporation or LLC. When you start a business, you’ll need to decide if you want to be a corporation or an LLC, which controls your business’s legal structure and has nothing to do with how it will be taxed.

Corporation

A corporation is a business entity that is legally considered to be entirely separate from its owners. Real estate corporations can be held liable for corporate actions and earn profits that are considered the business’s income and not the owners.

Generally, corporations are:

Owned by shareholders, who possess freely-transferable “shares” of the business
Managed by a board of directors and officers
Subject to strict record-keeping requirements and corporate formalities

Limited Liability Company

Like corporations, a Limited Liability Company (LLC) is also a separate legal entity from its owners. However, real estate LLCs provide more flexibility in management options and fewer record-keeping requirements.

LLCs are:

Owned by members, who possess “membership interests” with typically strict limitations on transferability
Managed by the members (usually) or by a non-member manager
Subject to limited record-keeping requirements and corporate formalities

Side note: If you’re starting your business to hold multiple real estate investments, you may want to consider forming a series LLC, which allows you to hold your investments in separate “series” within the same LLC for maximum asset protection and convenience.

Should Your Business Be An LLC Or A Corporation?

Whether an LLC or corporation is a better structure for your business depends on various factors, including your goals for your business and your desired management structure. You should consult with an experienced business attorney when deciding which type of entity is best suited to your ambitions.

Second Level of Business Classification — Tax Status

Once you’ve decided on a legal structure for your business, you’ll also have to choose how you want to be taxed: S corp or C Corp? Both corporations and LLCs have the opportunity to choose between the two tax statuses.

C Corporation

The IRS acknowledges C Corps as distinct taxpaying entities. This means that if you go with a C Corp, your business’ profits will be taxed like "personal income" of the corporation. You’ll have to file a tax return for the company each year. Any portion of the profits distributed to the owners will be taxed again as their personal income.

S Corporation

S Corps are what is known as “pass-through” entities. This means that S Corps themselves don’t pay taxes. Instead, the company’s profits (or losses) are passed through to its owners for tax purposes.

Each owner will include their portion of the company's profits and losses on their personal tax returns and pay taxes based on their individual tax bracket. Additionally, S Corp distributions are not subject to Social Security taxes as long as you’re paying yourself a reasonable salary. Because of the advantages offered by S Corp taxes, many real estate investors elect this tax status for their businesses.

Default Tax Statuses

The IRS will assign a default tax status to your corporation or LLC if you don’t tell them that you want them to do something different. What your default tax status is depends on the type of entity you formed and how many owners there are.

Default Tax Status For Corporations

When you form a corporation, the IRS will automatically consider you to be a C Corp.

Default Tax Status For LLCs

When it comes to taxes, there’s no such thing as an LLC. By default, single-member LLCs will be treated as sole proprietorships, and LLCs with two members or more will be treated as partnerships. The LLC will be viewed as a "disregarded entity" and will not be taxed.

How To Change Your Default Tax Status

If you form a corporation and decide you’d prefer to be taxed as an S Corp than a C Corp, you can file Form 2553 with the IRS to change your corporation’s tax status. Similarly, LLCs can file Form 8832 and choose to be taxed like an S Corp or C Corp.

S Corp Versus C Corp

So, you can elect to be taxed as either an S or C corporation. Why would you choose one over the other?

In short: If you are going to bleed your company dry, an S Corp may be better. If you are building a business and need to leave funds with the company to grow the business, a C Corp may be better. However, you should always talk to your tax advisor and your attorney to figure out which is best for your particular circumstances and goals..

When An S Corporation Is Better

An S corporation works really well when you’re taking all the money out because there’s only one tax level—at the shareholder level. That means the owner is the only one that’s taxed—the company is not taxed. This is the best option if you’re going to take all the money out of the business.

When A C Corporation Is Better

There are also many advantages to going the C corp route, including a 21% corporate tax rate. In a state like Texas or Wyoming or Nevada (where there aren’t corporate taxes), you’re getting a 21% flat rate on all the money you leave in the company. The more you can keep in a C corp, the better off you will be because of the 21% tax rate.

In a C Corp, the corporation is taxed, and then, when money is distributed, it’s taxed again at the shareholder level. If you’re taking money out of the company, it probably should be as salary, because otherwise, you’re going to be double taxed.

What’s Next?

After you decide how to tax your business (S Corporation or a C Corporation), you need to pay yourself a reasonable salary. You’re going to want a bookkeeper.

You’re an independent contractor employed by your business now, but you’ll have to correctly handle the withholdings. This includes filing the payroll tax reports. An experienced lawyer can help you get through this process and make sure you set everything up properly.

Interested in learning more? Check out our articles Using Your S Corp: Payroll Taxes and Using Your C Corporation’s Tax Brackets To Reduce Your Tax Burden.

Control Without Ownership: The Smart Way Real Estate Investors Own Property

If you are in a position to invest in real estate, congratulations! Your hard work, saving and diligent money management will pay off.

Now's not the time to ignore asset protection. This means structuring your business in such a way to ensure the maximum legal protections. Let's make sure your hard-earned money is kept as safe as possible.

Owning properties makes you a target for lawsuits. However, properly structuring the way you own properties makes lawsuits against your assets not worth anyone's time. Reliable asset protection kills lawsuits before they can begin. It makes legal actions against you so complicated and bound up in red tape that any would-be litigant will quickly run out of money and motivation to come after you in court. Instead of a pot of gold at the end of your rainbow, they'll find nothing but headaches and legal fees.

Whether you are new to investing in real estate or simply looking to restructure your existing investment portfolio, this article is intended to introduce you to a fundamental concept of asset protection: control without ownership.

Three Ways To Achieve Control Without Ownership

You might think that being rich means owning lots of assets. The truly wealthy don't on squat. Being rich really means controlling assets instead. So it follows that the underlying principle behind intelligent investing means transferring ownership of your investments to a legal entity, which in turn is controlled by you.

If you are looking to create such a legal entity, here are three options to consider: land trusts, an LLC, or a shell corporation.

1. Land Trusts

Anonymous and easy to create, a land trust is one of the most effective legal entities to transfer your property to. Now you may be thinking, “why do I need to be anonymous?” The simple answer is that anonymity is a necessary layer of protection against lawsuits—if people don’t know what you own then they won’t bother suing you!

Setting up an anonymous trust can be extra powerful as an investment strategy if combined with an LLC. Listing your trust as a member in the LLC, you establish two levels of separation from yourself and the assets you control.

2. Limited Liability Companies

The beauty of LLCs is that you are protected from the liabilities of ownership. The LLC itself is protected from any personal liability you face or judgements against you. Thanks to this in-built protection, LLCs should be part of every asset protection strategy. For protecting several properties, you can set up a Series LLC so each asset is separate from you and one another. While it can be complex to set up, with a competent lawyer, you should have no problems transferring your investments to an LLC controlled by you.

3. Shell Corporations

The idea behind a shell company is to have a vehicle for business negotiations and management that is separate from your asset-holding legal entities and yourself personally. An LLC can be a great choice for your shell corporation.

What About Equity Stripping?

While shell corporations, LLCs, and trusts are ways of hiding your ownership, equity stripping is a legal way to make your investments seem less valuable than they are. Essentially, equity stripping is when you saddle your asset with harmless debts, liens, and any other tool that lowers the perceived value of the equity in the asset. It is a common method of protecting assets and works as a way of changing perceptions to avoid being a target of lawsuits.

Things To Remember About Control Without Ownership

There's no need to run off and try to implement all of these strategies at once—that would be a complicated asset protection approach that would be overkill for most investors. First of all, make sure to get competent and trustworthy legal advice before considering any of these options. And secondly, you need to consider all potential downsides. These downsides include the costs and tax consequences of these "control without ownership" strategies.

If you engage in equity stripping, for example, taxes can be minimized with the help of a knowledgeable CPA. But you should tread lightly; taking on debt, is just that—debt, which generally is a negative thing. Extreme care must be taken so that it your approach is completely above board—otherwise you risk exposing your assets (or worse).

Don’t Take Half-Measures

You don't have a lot of time to spend on this stuff, right? Or maybe you are trying to save money. Either way, it may be tempting to half-ass your approach. This might creating one LLC and transferring all your assets to it. While this will separate you from your assets, it simply makes your LLC the new target for lawsuits. Also, if you forget to include an element of anonymity and pile your assets into a single company, you risk having that company being considered your "alter ego" and all those assets becoming vulnerable.

A job worth doing is worth doing well. You must consider how to best make your business unattractive for anyone to sue. This can only be done by fully outlining an asset protection structure which may involve multiple separate legal entities.

Remember: different states need different structures due to their state laws. Don't rely on online legal forms and advice that isn't specific to your needs (and that includes what you read here). You may end up with unnecessary fees and taxes without really getting the asset protection benefits you hope for.

It is not too much of an exaggeration to say that taking shortcuts and the easy route puts you in a position as if you hadn’t bothered at all!

The Takeaway

It is a no-brainer that if you have assets, you need to think about asset protection. As such, it is worth investing the time and effort into making sure your asset protection structure is suitable for your state, that it protects your anonymity, and that it makes suing for your assets untenable.

The primary principle is that you need to transfer ownership of your assets to a legal entity that you control. Should something go wrong, there will be no clear target for a lawsuit.

While you may consider trying to do this yourself, many law firms will have experience setting up asset protection and know exactly the right structure for your circumstances. It is recommended to take advantage of this so that you can control property the smart way, the way the truly wealthy do. Own nothing.

What Is The Difference Between A Single Member LLC And A Sole Proprietorship?

If you are looking to start a real estate investing business, you should be familiar with two popular business structures at your disposal.

These are Single Member Limited Liability Companies (SMLLC) and Sole Proprietorships.

Both options can help you get your business off the ground, but it is worth considering the protections and future commercial growth you can achieve with each. Sole Proprietorships offer simplicity and ease of creation, and an SMLLC is advantageous if you are looking for a legal limitation of liability and the flexibility to change tax status as you grow.

Starting a Business: Giving Structure To Your Idea

Though it may begin with an idea, the successful establishment of a profitable business requires a suitable legal framework for hiring employees, purchasing capital, and saving money all while keeping the taxman happy. In this regard, many legal entities (including both a Sole Proprietorship and an SMLLC) are able to perform these basic functions and the difference comes in the advantages each provides.

What Is a Sole Proprietorship?

Put in the simplest of terms, a Sole Proprietorship is when you yourself take on the responsibilities and benefits of running a business. While you can use your own name, it is better to take on a trade name. Forming an LLC can be done by filing the name with the clerk in your county for a nominal fee.

Depending on the type of business you intend to run, you will need to acquire the necessary licenses and permits. If you wish to hire employees you will need an Employer Identification Number as well. All of these may come with certain fees but nevertheless the whole process is easily the cheapest method of setting up a business.

In addition to its low cost, there are certain tax advantages afforded to a Sole Proprietorship, (this will be expanded on later) and this, combined with its simple set up process, makes it an attractive option.

What Is a Single Member Limited Liability Company (SMLLC)?

In Texas, it is permitted to establish a Limited Liability Company (LLC) with a single owner (referred to as a ‘member’). Although there are many types of LLCs, they all have the benefit of limiting liability for their members. Of course, this is a huge advantage as you will not be at risk for the LLC’s debts and conversely, the LLC will also not be liable for your personal liabilities.

Since it is a sort of hybrid between partnerships and corporations, LLCs have a certain relaxed level of formality when compared with traditional corporations. This is ideal for smaller business operations who want a streamlined process while also getting the perception of credibility that comes with being a company.

Setting up your SMLLC will be a bit more of an involved process than a Sole Proprietorship. You will need to file Articles of Organization for your new LLC with the state and then draft an Operating Agreement to ensure the maximum possible benefits are made available.

Shared Benefits Between Between A Single Member LLC And A Sole Proprietorship

While both a Sole Proprietorship and a single member LLC are subject to a self-employment tax, overall the tax burden can be reduced by taking advantage of pass-through taxation. In short, pass-through taxation is when the profits pass through the business, in this case, either a Sole Proprietorship or a SMLLC, and is taxed as part of your personal income tax return. Since you can deduct expenses including up to half of the self employment tax, you can greatly reduce the amount of tax you need to pay.

Additional Advantages of The Single-Member LLC

As expected given its popularity, the SMLLC does afford some additional benefits over the Sole Proprietorship model. For many, the limited liability provided by an SMLLC is the most attractive feature as it allows for separation between personal affairs and those of the LLC. For this reason, although not required, having an Operations Agreement for your SMLLC will effectively separate your affairs from those of the LLC.

Furthermore, an LLC has further tax flexibility as it can opt to be taxed as a Sole Proprietorship (as explained above), as a partnership or as a corporation. As your business grows, having these options is of great benefit to make your tax burden as efficient as possible.

For enterprising individuals, trading as a Sole Proprietorship or using an SMLLC are attractive options due to the pass through tax feature. While they differ in the legal protections offered, the creation process, and the level of tax flexibility, it is worthwhile to consider seeking competent advice to determine which one is right for you.

Structuring a Real Estate Investment Business: Tips from The Small Business Administration

You’ve been thinking about investing in real estate for a while now. Maybe you’ve even purchased your first investment property. Now it’s time to get serious about your plans. The first and most important step? Choosing a structure for your real estate investment business—one that protects you and helps you achieve your goals.

There are quite a few options to choose from, whether that’s establishing a partnership with a fellow investor or even establishing your business in a different state from your own. Your absolute best place to look when deciding how to structure your business, besides a trusted legal professional, is going to be the wealth of information available through the Small Business Administration.

What Is the SBA?

The SBA was established in 1953 under Eisenhower’s administration with the intent to “aid, counsel, assist and protect the interests of small business.” The agency’s goal is to grow small businesses around the country through the sharing of valuable information and start-up or expansion funding to businesses with a net worth of under $7 million and post-tax net profits of less than $2.5 million.

SBA Funding Opportunities

Many became aware that the SBA provided funding following the launch of the Paycheck Protection Program (PPP) earlier this year, but they offer quite a few methods of acquiring funding as well. These opportunities exist as both low-interest loans or straight investment capital (matched by the SBA 2-to-1!)

An SBA 504 loan or 7(a) loan will have limitations: investors can only use them to purchase or repair owner-occupied real estate and only 40 percent of commercial property bought with these loans can be rented to tenants. These loans are a great option if your investments meet these criteria.

Choosing the Right Business Structure

You are more than able to get a loan, buy some real estate, and begin renting it out as a solo business venture, but we wouldn’t recommend it. Without legal protections available through structures like an LLC or S-corp, your personal assets, including your home, your retirement savings, and your child’s college savings, will be vulnerable to lawsuits from tenants or others.

A major consideration when choosing your business structure should be taxes. There are different paths to take if you prefer filing a personal return and paying self employment taxes versus paying yourself as a salaried employee of your own business. A CPA or legal professional can help you navigate the right option for you and your business.

There are four primary structures available for real estate investment businesses:

Sole Proprietorship
Partnership
LLC
Corporation (S-corp or C-corp)

Sole Proprietorship

This may be just fine for a self employed digital worker, but when you begin investing in something like real estate a sole proprietorship will do nothing to protect you. By operating under this structure, your personal assets are indistinguishable from the business’s assets and thus at risk if you are hit with a lawsuit.

Partnerships

A partnership can be either limited or limited liability, but this structure is only available to businesses with two or more owners. The liability will depend on each partnership’s structure, but at least one partner will have limited liability.

Limited Liability Company (LLC)

An LLC can legally separate your business and personal assets, with the LLC holding the business assets separate from your personal property. If, God forbid, a lawsuit arises, the only assets at risk will be those owned by the LLC. An LLC can be formed by individuals (single-member), partners, or even large groups (multi-member). There are also different types of LLCs, so do your homework! You may also be interested in our article, What Is The Difference Between A Single Member LLC And A Sole Proprietorship?

Corporations (C-Corp and S-Corp)

Similar to an LLC, forming a corporation creates a separate entity from your personal life. This offers an additional layer of protection in that corporation owners are protected if a lawsuit is filed against the corporation. The primary difference between an LLC and a corporation is in taxation and how salary is handled.

Time to Start Investing!

Even if you have been investing in real estate for years as a sole proprietor, it’s not too late to consider a revamp of your business to protect yourself and your family. Once you have chosen your business structure, registered your business with the necessary government agencies (varies by state), and received your tax numbers, you’re ready to start operating under your new, more robust business structure!

Benefits of Forming an LLC (And A Few Risks)

By reading this article you are either a real estate investor or an aspiring real estate investor. You have surely talked with people discussing LLCs (Limited Liability Companies.) One of the struggles investors run into is finding reliable information that they can trust. Learning about the benefits of forming an LLC is no different.

Today I will tackle how to start an LLC. I will also list the risks involved in operating an LLC. After all, knowing the weaknesses of an entity can allow you to build a stronger strategy. This allows you to sleep well at night knowing all your bases are covered.

Benefits of an LLC

There are many benefits to using a LLC as the foundation of your real estate business. The most important benefit is that this entity limits liability and minimizes personal exposure in the event of a lawsuit. When a LLC owns a property it will be responsible for the property in court, not you. If the lawsuit it lost, the losses are limited to what is in the LLC.

Avoids the issue of “double taxation.” The LLC gives you the ability to file the property as a pass-through entity. You list any profits, or losses, on your personal tax return. But LLCs are flexible! They can be taxed differently depending on your needs. See our article on the tax benefits of the LLC for more.

The LLC can be formed and operated in all 50 states and is uniformly upheld across the United states. You can choose to form a LLC in your local state or in a any other state, depending on your needs.

A LLC can also function as a “operating company.” Sometimes also referred to as a “shell company.” Using a LLC in this way allows investors to limit their exposure even further! Utilizing a LLC as an operating company means that it holds the liability for your business operations. The difference is that you don’t place any assets in it. When it gets involved in a lawsuit you aren’t risking your properties, just your LLC. This article and video explains what this structure will look like.

Risks of an LLC

There is no “perfect” business entity, and the LLC is no exception to this rule. The important thing is to understand its strengths AND weaknesses to ensure your asset protection strategy is effective.

Most LLCs will have an annual fee and corporate management requirements. This will vary from state-to-state, so be sure to know what your state requires.

You need to form and operate the LLC to ensure it provides the liability protection you want. If you don’t form and operate the LLC properly, you are investing into an entity that does not protect you! This type of work needs to be done right the first time. You can also pay someone experienced who will file the entity and teach them you how to operate it right from the start.

The LLC will require separate banking, records and tax returns. This is to ensure that you are able to prove it operates separately from you. This also means more work for you. Once you get the hang of these entities it is very simple, but the learning curse can be rough.

All properties owned by a LLC are held in a “pool,” and are not protected from each other. This is why we recommend that investors with more than a single investment property use the series LLC instead.

How to Protect Yourself as a Real Estate Money Partner

One of the more elegant features of the real estate world is the way the whole ecosystem encourages symbiosis. Investors often are stronger together, especially in the face of an obstacle. For most investors, start-up capital or even cash flow to expand will become issues at some point in an REI career. Money partnership is one creative way REIs are helping each other by offering complementary skills to one another and combining forces on an investment. This is a clever way to square a capital issue or get help finding deals, depending on your role. Everybody wins when these arrangements work out. Here are some of the things you need to know to make sure yours does.

Money Partners and Credit Partnerships Explained

The money partner is the term for the person in this arrangement who has capital to spare. As for the person that has time or scouting skills or other resources, they are sometimes called the entrepreneurial partner. Other terms for these types of arrangements include credit partnership and partner funding.

Many of our investor clients are at the stage in their careers where they’re richer in capital than time. But don’t get discouraged, most beginners start out rich in resources other than cash. It may be your willingness to spend time researching, number-crunching, your day job skill set, or even your charm or tenacity--but there is certainly something about you that makes you valuable to another investor even if you’re cash-poor. Eventually, as your career progresses, your time will become “expensive” enough that you may assume the other role. Many REIs transition into mentorship.

How to Protect Yourself as a Money Partner

If you’re the “bank” in any kind of deal, you’ve got to look out for yourself. Money partnerships aren’t any different. You’re taking a risk, so of course you want to take the steps you can to mitigate that risk. Here are some of the most important tools you can use to keep yourself protected.

Option #1: Create Clear, Thorough Contracts

If you’ve got concerns about what your new partner may do if they’re not responsible in their duties. But that’s why the smart folks in our early legal system (and its predecessors) gave us contracts: to get everyone’s roles, responsibilities, and rewards in ink. Simply using basic contracts to solidify your verbal agreements can prevent nasty disputes, and even lawsuits, down the road.

If you have specific concerns, address them in the contract. Ask your attorney what some wise provisions would be given the specific fears or worst case scenarios you’re aiming to prevent. Odds are good you can rule out a lot of shenanigans by simply taking the time to create an effective contract. Anyone who wants to make money with you should be willing to sign a contract with fair, reasonable, comprehensible terms.

Option #2: Use Entities To Limit Your Personal Liability

Where a contract can’t always help you out is in the realm of lawsuits. Unfortunately, partners sometimes get bad blood. Deals sometimes don’t go as planned. Of course, most people get angry and play the blame game. Some people’s preferred venue for the blame game just happens to be the courtroom.

Don’t become a victim to your partner revealing themselves to be bitter or litigious. Protect yourself by creating an LLC and operating it in a manner to a venture-specific LLC. Use your Operating Agreement to clarify your relationship to as fine a degree as you like, and even divvy up profits and losses as you agree is fair. The great thing is you can have equal power if you like, or a money partner may want a greater share of profits. These are all the details you can get on paper when you file your LLC, but filing your LLC serves a second purpose: asset protection.

The LLC limits liability around real estate investments. Moreover, a Traditional or Series LLC separates you from the asset and its problems. You’re separate and no longer “own” it, but control it. What’s great about not owning something is it’s impossible to lose it in court. But of course, you retain legal control. Clever business structures can have many benefits on top of helping you CYA in a money partnership.

Using Corporations to Manage Real Estate LLCs: The REI's Basic Guide

It’s important to set up your real estate LLCs the right way.

Improperly established, noncompliant or mismanaged LLCs are pointless at best and costly at worst. Your entire asset protection can be undermined by one poorly structured or managed entity, because the entity is such a crucial piece of any asset protection plan.

No matter what kind of real estate LLC you use—Traditional LLC, Series LLC, a combination of both, a special variation like a married couple LLC, or even multiple LLCs with other structures on top—you must ensure your business choices are clearly conveyed in your paperwork. This includes your Operating Agreement, which can be amended, but functions as your LLC’s Bible. So, it’s actually best to get your agreements with any partners, rules, expectations, and plans for dividing profits and losses in lockstep and recorded in ink accurately from the moment you form the company.

It’s equally critical that you know who is going to manage the LLC and how. After all, you do get to make this decision. All too often, members of multi-member LLCs don’t understand the depth of their options, but you’re not going to be one of them.

Here’s the straight dope on using a corporation to manage an LLC, what alternatives you have, and how to decide if corporate LLC management is right for you.

Can a Corporation Manage an LLC?

Usually people ask if a corporation can own an LLC, but this is an example of someone asking the wrong question for the information they seek. Of course a company can buy an LLC, but we’re referring to using a corporation in lieu of a single human manager.

So yes, a corporation can manage an LLC. But it’s far from the most common type of LLC management.

Ways You Can Manage Your Real Estate LLC

To know if going the corporation management route is right for your LLC, you’re going to have to consider the other ways investors manage their companies. Most people go with one of two options:

Member-managed LLCs. These are by far the majority. Power tends to be divided equitably among the members. A single-member LLC is essentially managed this way by default.
Manager-managed LLCs. We’ve talked about manager-management concerns and tools here on the RLS blog before and encourage you to learn more. But essentially, an LLC that appoints a manager will legally give that manager certain powers. Doing so is essential so the manager can do their job of running the LLC’s daily operations. Managers may buy or sell assets, hire and fire employees, and take other actions that directly impact members. Members must have confidence in their manager and protect themselves with a well-crafted Operating Agreement.

Investors usually choose their management style. If you have a great person in mind and nobody on your team will rise to the occasion, a manager’s a great way to go. If each member has confidence the manager is trustworthy, and all ensure that the Operating Agreement of the LLC accurately reflects their desires, then a manager can be a great thing for a real estate LLC.

When a corporation manages your LLC, you can think of the corporation as standing in for a human manager. There’s actually a long history in American law of treating corporations as people, a concept known as corporate personhood in legalese. Depending on the type of corporation you form, you may have several individuals collectively making decisions about your daily operations. Note that your corporation can actually have an unlimited number of managers internally.

Check out our article, Manager-Managed LLCs vs. Member-Managed LLCs: What’s Best for Real Estate Investors?

How Do You Form a Corporation to Manage Real Estate Investments?

Forming a corporation is easy. All you really need to form one is the help of a business or real estate attorney.

But first, are you sure you need a corporation? For many investors, using a corporation is overkill. Most are just fine with cheaper entities.

You need to have an idea of what you want to do. You also need to be clear on what a corporation actually is. First of all, we’ve got two options: the C-Corporation and S-Corporation. Of the two, the S-Corporation is far more popular.

Corporations require many more legal steps than LLCs, including:

Naming a board of directors.
Mandatory meetings (complete with required minutes).
Maintaining corporate compliance (which is far more challenging than with alternative entities, almost always requiring some form of professional legal or financial help).
Tax, legal, and regulatory compliance concerns.

Some businesses need the benefits of corporations, so the regulations are simply the price of admission.

A corporation only helps protect your assets if it’s in lock-step with your business plans. For this reason, many investors choose to form their own. That way they can be sure the corporation is friendly to the LLC.

As I said, using a corporation is overkill for many real estate investors. Most are just fine with cheaper entities.

A Happy Medium: The LLC Taxed as an S-Corporation

The most obvious alternative to a corporation is using a more traditional management style for your LLC: member-managed or manager-managed. But you’ve got creative entity options, too. We’ve talked about some LLC and Series LLC perks already, but did you know that your LLC can be taxed as an S-Corp?

Real estate investors opt for this choice because:

LLCs taxed as S-corps receive pass-through benefits and can possibly save some investors thousands in taxes, just as an S-Corp can
LLCs are easier to set up.
It’s cheaper. One filing fee, one Operating Agreement, no meetings or minutes or boards to handle or worry about paying.
Asset protection for active businesses is ideal for this structure. House flippers or vacation renters are examples of “active” real estate businesses. S-Corp structures are ideal for these, but the LLC taxed as an S-Corp is a cheaper alternative if an S-Corporation isn’t practical.
It’s easier. Most of the time, LLCs are hands-down quicker and simpler to form than a permanent corporation. Try using a Joint Venture agreement alongside this entity to test out a new potential S-Corporation set-up.
Corporations are best suited to larger businesses. By “large,” we mean the kind where a C-level executive team, board of directors, and stock options aren’t just givens but important details.

Now that you’ve gotten the basics down, consider the details of your jurisdiction. In many states, including Texas where Royal Legal Solutions is based, you can convert an LLC into a Corporation. This detail may be helpful to ask your attorney about if you’d like to use an existing corporation. In states that permit such conversions, an investor with an unused LLC may be able to save some major cash by converting into rather than forming a corporation. That said, always check with your personal counsel to be sure this is true for you.

Making the Choice: Is A Corporation-Managed LLC Right for Me?

Determining whether corporate management is the best move for you will depend on several personal factors. You may first consider whether such management is necessary. Small businesses may find that a corporation is more trouble than it’s worth, and that an LLC or two-company Series LLC and shell corporation structure is more effective. Professional help from a qualified real estate lawyer will be a necessity regardless of your entity choices.

While the vast majority of investors decide against managing their real estate LLCs with corporations, your situation may call for such a structure. Learn what you can about your alternatives such as taxing an LLC as an S-Corporation, as well as using other structures or management styles.

We believe it’s best to assess your members’ basic needs and study corporation management before making this judgment call. So keep reading. Finishing this article’s a great start. But we hope you’ll continue learning the best strategies for managing your business.

Selecting the Best Entity for Real Estate Flipping

Flipping is just different than other investing strategies. In terms of both the financial aspects and legalities of running this type of business, there are a few things flippers should know about organizing and defending their real estate portfolios. Chief among the things every flipper should understand is how to construct an asset protection strategy that adequately defends against lawsuits and forms a sound structure for active real estate businesses. Here’s how.

Do Your Homework Before Forming Your Entity: Special Concerns for House Flippers

House flippers’ asset protection strategies should reflect their actual needs. Here’s a short checklist for you to consider before you start with entity formation.

When you form your real estate entity, consider how it will fit both within your asset protection and broader investment strategy. Here are some critical issues to consider:

Tax issues. Do you want the flexibility of the LLC, which may be taxed as an S-Corp or more similarly to a partnership?
The best kind of entity for an active business. The active nature of flipping is clear when we compare this REI tactic to say, buy-and-hold investing where investors hold properties for years--such investors are relying on passive income and assuming a more passive role generally.
How frequently you plan to make transactions. Many flippers will have a property bought and sold inside of a year, and certain entities are superior for frequent transactions vs. rarer ones.
Licensing and other operations issues. There may be reasons for a savvy house flipper to also acquire a real estate license (or work with a team member who has one), even if doing so isn’t legally necessary. What’s best for you in terms of daily operations will come down to many factors, including personal preference.
What percentage of business is your flipping activity? If you are exclusively a flipper, you will almost certainly require a different approach than an investor with only minor flipping activity or who doesn’t rely on flipping transactions for profit.

If you have specific questions about these concerns in your life, speak with a qualified real estate attorney as well as an advisor you trust familiar with your investment market(s). Let’s shift gears and dive into the decision-making process you’ll use to select the entity for your flipping business.

REI Entities for House Flippers: What’s the Best Choice?

We’ll talk about a couple of popular choices for house flippers. Ultimately, the only way to know for sure what will be best for your business, portfolio, and plans will be the product of conversations with personal advisors. But feel free to use these rules of thumb as a starting point for your research and discussions about forming an entity for flipping real estate.

We’re going to talk about key strategies for house flippers with the understanding that flipping is a form of active trade. LLCs and S-Corporations are popular options. Learn more about the entities you can use and the key questions you’ll need to answer below.

The Limited Liability Company: How to Flip Houses With an LLC, Series LLC, or Both

It’s vital that those engaged in active real estate flipping businesses find a way to limit the many liabilities that can accompany this investing method. For many flippers, the Limited Liability Company helps square both the issue of liability and how to formalize the flipping business.

Now, the Limited Liability Company comes in a few variants. You’ve got your Traditional LLC, an affordable classic; the Series LLC, which allows you to quickly create an infinitely scalable network of mini-LLCs, as well as ways to use both types of LLC together for a formidable asset protection structure.

We hope to help you make the best decision for you by explaining how these companies protect your assets, how you can use them, and ways to approach some of the choices you’ll have to make whether you establish one Traditional LLC or a two-company structure. One of your unavoidable decisions is how your LLC will pay taxes, and yes, you get to choose.

The Tax Choice: Should You Consider Taxing Your Real Estate LLC as an S-Corp?

One reason flippers like LLCs is because you have options for taxation. LLCs may be taxed like partnerships or as S-Corporations. Making the S-Corporation judgment can be difficult for any investor, and we strongly recommend involving an REI-savvy CPA. But here are some things you can discuss with that professional, or anyone else assisting you with forming your real estate LLC.

S-Corporation makes sense as a tax savings strategy for some investors, but of course we all know there are no legal silver bullets for tax minimization. One huge benefit of using the LLC in general is pass-through tax treatment, which is still available if you’re taxed as an S-Corp. LLCs are beloved pass-through entities for investors, meaning profits and losses are simply recorded on the company members’ respective personal income returns.

There are certain advantages of S-Corp taxation for house flippers:

S-Corporations are legally separate from the members of LLCs for liability purposes.
S-Corporations and LLCs offer easy ways to add and account for new members.

Be aware you may hear discussions of the S-Corp vs. the LLC as if this is an either-or proposition. Resist the temptation to listen to such reductive views, because you truly can have it both ways. One could in theory form a separate S-corporation entirely, but for most investors, opting to use an LLC taxed as an S-Corporation is a simple choice that preserves the beneficial features of both entities. Even better, the LLC taxed as an S-Corp is easier to run than a fully separate S-Corporation (complete with its many legal requirements). Not every flipper will even benefit from S-Corp taxation, but enough do that you should consider all options.

Combining Entities for Greater Protection: How to Use a Traditional and Series LLC Together

Some investors may be happy with a single entity, but many of our flippers and other investors love the tried-and-true method of pairing the Traditional LLC with the Series LLC. Under this model, the Traditional LLC serves as your operating or shell company. It manages day-to-day activities like collecting rent, paying employees, etc.

Meanwhile, your Series LLC functions as an asset-holding company. This company must never interact with the world, because that’s what the Operating Company does. To maximize the Series LLC’s effectiveness, all you do is create as many Series as you have assets, direct your attorney to help you make the appropriate transfers so each asset is in its own Series, and ta-da. You’ve got yourself a basic two-company structure. Use it correctly, and it can protect your real estate assets for life.

Using your entity correctly means ensuring liabilities go where we want them. In the case of the two-company structure, that Traditional LLC is the company we actually want a would-be litigant to come for. It doesn’t own anything. The company that does own all your assets, the Series LLC? It hasn’t ever been exposed to those liability-magnet business operations. By separating these functions structurally, you prevent many lawsuits before they even begin simply because it’s harder to sue this structure than a person. The system works, and your assets stay under your control.

No matter what you decide, trust your experts, be transparent, and fearlessly gather information. We’re here to help you while you learn the best way to establish your flipping entity and protect your new business.

Interested in learning more? Check out our article Real Estate Flipping: LLC Taxation Issues To Know About. You can also see our article over at BiggerPockets called What’s the Most Powerful Business Entity for House Flippers?

How to Control Property Without Owning It: 3 Simple Methods

We often emphasize that fabulously wealthy folks don’t own assets, they control them. It’s something we point out often at Royal Legal Solutions, because you don’t have to be rich (yet) to borrow a few things out of the Fabulously Wealthy Playbook.

Let’s do a quick crash course in the top legal ways to control property without owning it for asset protection purposes.

Method #1: Use Land Trusts

The handy anonymous land trust is one of the easiest methods of controlling property without owning. The trust simply holds title to the property for you, removing your name from any public record. You get anonymity, become tougher to attack legally, and are legally separate from the asset but reap its rewards as the beneficiary of your land trust.

Method #2: Use Liability-Limiting Entities Like LLCs and Series LLCs

Another great way to control an asset is with an entity. We like those that limit liability, because they help protect your assets in the event of a lawsuit or threat.

Examples of the kinds of companies we’re talking about include:

The Traditional LLC (short for Limited Liability Company)
The Series LLC
The Delaware Statutory Trust for California investors

Each of these entities offers liability limitations inherently. You’re separated from your assets and any claims around your real estate can’t affect your personally. So say a tenant goes careening through your deck and hurts himself. He may try to sue for your property.

Depending how you set up these entities, you can either stop the suit before it starts or make it a complete waste of the tenant’s (and more importantly, his attorney’s) time. Entities can be structured to separate assets from each other, limiting how much anyone can receive by court judgment. If you set up your companies with an attorney’s help, you can own them completely anonymously, making a lawsuit nearly impossible to file. Either way, companies are much tougher to sue than people and one of the smartest ways to control property.

Method #3: Use a Shell Corporation for Property Ownership

Why should you risk exposing your personal self or assets to the world? A shell corporation can do this for you and streamline your real estate investments, too. Most investors will find the Traditional LLC works just fine for a shell corp. If you already have one and it has never held your assets, you may consider using it.

Otherwise, you can easily form your LLC; property ownership and ALL of your other real estate investing operations can be performed from there: collecting rent, paying property management, etc.

Next, you’ll need an asset-holding company for your properties. We recommend the Series LLC if you’ve got more than one property or ever plan to, because the Series LLC is a cost-effective, scalable entity option.

All this company ever does is hang onto your assets for you. NEVER do business from your asset-holding company: that’s your shell company’s job. With this kind of structure, your two companies exist to handle assets and operations 100% separately and independently of one another.

For a deeper look at all this stuff, check out our article, Control Without Ownership: The Smart Way Real Estate Investors Own Property.

Equity Sharing for Real Estate Investors: Methods for Acquiring & Protecting Your Shared Asset

Equity sharing is an increasingly popular way for investors to reap the rewards of investing even if they’re strapped for time or cash. Such arrangements can allow cash-poor or newer investors with time for pavement-pounding/vetting/reading to team up with time-strapped investors who like funding smart deals.

Equity sharing may benefit any investor. Those trying to break into REI, take heart that finding excellent deals is an incredibly valuable skill. A deal-finder will always find deal-funders.

To learn more about equity sharing arrangements, reasons real estate investors consider them, how common arrangements work, and protecting your assets when sharing equity, read on. If you want to learn a lot about equity sharing very quickly, you’re in exactly the right spot.

What is Equity Sharing for Real Estate Investors?

Equity sharing may refer to any situation where one investor pairs with others to afford, finance, and purchase an asset. The investors split all profits or losses at the ratio the agree to (which need not be “fair” or even provided all agree).

Everyone involved in sharing equity has interest in the property. Family members sometimes use equity sharing to help transition mortgaged homes to the next generation, but our discussion is confined to REI today. In these cases, the interest is a business one. Equity sharing may be used to:

Divide costs of property and improvements
Divide all profits/losses
Get people in on the same deal with minimal hassle
Allow one investor to live in the home (with a goal of paying off the mortgage)
Develop short or long-term plans for the asset

Equity sharing looks as different as the investors involved, but we’ll show you examples of your best options for asset protection of equity-shared properties. First, let’s look closely at why REIs get into equity sharing

Reasons Real Estate Investors Consider Equity Sharing Arrangements

We alluded above to one huge reason these arrangements work between investors: different investors bring different skills/abilities, pool them, then agree to share any profits or losses from the asset they have in common. While an investing newbie and more experienced partner are a common combo, the powers of any investors can be “pooled” in a complementary way. Some people mistakenly believe this is the job of a legal partnership, but with equity sharing, you don’t have to just have one “partner.”

You’re also not confined to a single method. There are many ways to legally protect yourself while sharing the equity of a property with one or more people. We’ll get into some specifics, but for now, just understand that equity sharing does not preclude you from using land trusts, LLCs, or any other asset protection tools. While your arrangement may impact how to most effectively use asset protection or legal tools to protect the equity-shared asset, it doesn’t affect the options in your legal toolbox.

What Options Exist for REIs Interested in Sharing Equity?

We promised there’s more than one way to share equity, and here’s where we deliver. These are our top three choices for protecting assets in equity-sharing arrangements.

Option 1: Go the Joint Venture Route

Using a Joint Venture for a new partnership isn’t just a smart move. JVs are also a great way to test-drive your new business relationship. See how you and your partner(s) handle challenges of the first asset in your equity-sharing arrangement while protecting yourself with a Joint Venture Agreement.

You can choose to form a venture-specific LLC to further protect yourself, your asset, and your partners. Joint Venture-Specific LLCs can last for as long as you like, or for only the period the asset is under your control. You decide terms in the beginning, when you form the LLC’s Operating Agreement.

Option 2: Use Limited Liability Companies

Owning a company with someone low-commitment. It’s not marriage: you get directions, a simple way to undo the arrangement, what’s allowed, what’s not, and literal rulebooks in the form of your Articles of Incorporation and Operating Agreement. You and your partner(s) may benefit tremendously from using an LLC to protect your equity-shared asset.

A properly established LLC prevents either you or any individual from being directly associated with the asset. You may choose to use other tools to preserve anonymity on top of your LLC. If you already own an LLC that has never done business (AKA a “shelf” corporation) you might use that.

Note From Royal Legal Solutions’ Staff Legalese Translator:

Shelf companies are not the same thing as shell companies. That little “f” makes a huge difference. Shell companies control the operations side of businesses, normally preserving your anonymity. They’re never supposed to hold assets.

Shelf companies also don’t own or do much initially. Most REIs creating a shelf company form an LLC well in advance of needing it and don’t use it much or at all. After formation, the company stays “on the shelf” until a later date. Reasons investors form shelf companies include for their own eventual needs or to sell. Banks, lenders, and even partners are skeptical of “new” LLCs. But an LLC that has been “shelved” for years can be activated by simply performing a transaction.

You can see why investors mix up these concepts. That Traditional LLCs are great entities for both shell and shelf companies doesn’t clear up any confusion.

Keep definitions straight by remembering what these entities do: a shell company hides your operations and identity from the world, just like a turtle’s shell. A shelf company, however, is one you make and stick “on the shelf” until someone needs it. Congratulations! You never have to get these ideas confused again. Back to your regularly scheduled investing content...

Option 3: Create a Private Arrangement Your Attorneys Can Agree On

Let’s say hate Options 1 and 2. That leaves literally every other legal structure and agreement, which trust us, includes many permutations of options. The quickest way for most investors to figure out their real preference is to get a trusted attorney’s opinion. If you and any partners do so, your interests may align. Your attorneys might independently give you the same thoughts, or some options and their benefits for your situation.

If you and your partners don’t wish to throw money at multiple separate lawyers (because honestly, who does?), you can always approach an impartial real estate lawyer together, tell them what you’d like to do, and ask their thoughts on the situation. Take notes! This doesn’t have to be the same lawyer who helps craft your solution. They’re just a qualified attorney you and your partners agree to trust to develop possibilities for your equity-shared asset protection strategy.

After all, none of you want your property to get taken away by a lawsuit. Proactively defending your equity-shared asset can eliminate this terrifying, but all-too-common, possibility.

How Do Deeds and Titles Work For Equity-Shared Property?

A common question is who holds title to equity-shared properties. In the case of REIs conscious of asset protection, the question is what holds title (hint: sometimes it’s an anonymity-preserving entity/trust). Protected investors don’t like leaving their names on anything, especially titles and deeds. Deeds cause equal confusion, as the deed of an equity-shared property requires each owner to clarify their relationship to every other owner

But let’s suppose, just for example, that 14 investors enter into an equity sharing agreement. Which name would the title be under?

The real answer: it depends. On a few factors.

We’ve seen some beyond-sticky real deeds where, say, 12+ people want to share equity on a property and some are married couples. If each individual records their name, remember they will need to identify their spouse and also explain all other relationships to the remaining partners (however many there are). If you’re one of our 14 investors, you’ll ID your spouse if they’re involved, then explain the relationship you have to all other dozen investors.

Or, avoid this dilemma by controlling the entity without any partner directly owning it. All options above allow for this. LLCs, land trusts, and other legal options exist protecting equity shared properties. Number of partners won’t impact your level of asset protection, but can influence which option you want to use.

Is It Legal to Have an Offshore Bank Account?

Yes, now let’s all go out for a drink.

Just kidding. We take this question very seriously as asset protection professionals. But we’re also human, and understand why offshore accounts sometimes get a bad rap (and rep). If you’ve only heard about them in crime dramas or outrageous news reports, you’re hardly to blame if you’ve gotten the impression that offshore banking is, well, a bit shady. Today, we hope to show you such impressions are mythical and in fact, ordinary citizens open perfectly legal offshore accounts all the time. And to their benefit, from a lawsuit prevention point of view. (For more, see Why Ordinary People Set Up Offshore Bank Accounts.)

But what about the not-so-ethical Americans?

Brutal Reality, Coming Up Cold: Yes, you can use an offshore account to commit illegal acts. But if you do, that’s on you, not the offshore account.

The truth you haven’t heard yet is that there’s nothing--absolutely nothing--inherently illegal about Americans using these accounts. In fact, it’s often a smart move from an asset protection standpoint. Let’s sort out legal fact from legal fiction when it comes to offshore banking. Along the way, you will find some helpful tips for operating a current or future account.

Legality of Offshore Baking: Can Americans Use Offshore Banking?

Let’s take a quick look at how American law has addressed the subject of offshore banking as of 2019. We must focus on U.S. law this time, though there are plenty of excellent reasons why individuals from other countries may enjoy the benefits of offshore banking. If you’re among them, check with a qualified lawyer in your jurisdiction.

There isn’t a single piece of American law that restricts any citizen from owning and operating an overseas account. This has always been a perfectly lawful method of asset protection, and you don’t need to explain your reasoning for opening an offshore account to anyone at all. Except your attorney, who should be in the loop when considering opening foreign accounts, moving money in or out of the country, or making other financial moves that could affect you or your businesses legally.

Major financial transactions CAN impact your legal structures in ways you’re unaware of--so you’re not “bugging” your attorney by asking him or her to do their job. It’s their job to let you know about legal traps you could fall into, but the bank for instance, has no such obligation.

Warning: Foreign Scammers Will Use Ignorance of the Law Against Americans

One thing to be aware of is that scammers are aware that Americans generally don’t know their own law, let alone that of other countries. Scammers simply create accounts OFFERING banking services directly. “Directly” means via email, personal message, something you either must click on or download an attachment to see in full. These types of messages are almost always a type of scam for your information known as phishing/spearphishing (which REIs are targeted for). Scammers often lie about American law to try to pressure you to click links, take bait, or even just keep talking.

Here’s what to do if you get a fishy email: shut your mouth, don’t reply, and don’t even click on anything. STFU, for your own sake. Google the company, at least. If it doesn’t exist, scam confirmed. And that’s why we don’t talk to strangers about offshore accounts.

It’s critical to vet any foreign bank you intend to use to ensure its legitimacy before you even begin broaching the topic of opening an account. You’ll want to also check out reviews from other foreigners about the bank. There are entire sites dedicated to assisting you in finding reviewed, legit offshore options. But there is also real law in pertaining to U.S. citizens about their conduct in using offshore accounts.

The law known as the Federal American Tax Compliance Act (FATCA), is the most essential law you should understand. We’ll dive deeper into its spirit below, but for now, what you need to know is basics of the law itself, since it does apply to all of us as federal law.

Introducing FATCA: The Basics and How the Law Can Affect Your Offshore Account

Here’s the deal with the FATCA, and once again, that’s the Federal American Tax Compliance Act of 2010. It was amended in 2014, the most recent change at the time of this writing.

Now federal law may sound very scary and authoritative, but it’s just basically a reminder to not do the kinds of illegal things we strongly suspect haven’t even crossed your mind. After all, you’re smart enough to be reading RLS’s content. We know your style’s more about following the law than trying to figure out how to break it.

That’s why we’ll reward you by cutting to the chase about FATCA’s requirements:

Uncle Sam divides up American citizens for the purpose of this law into those living abroad, earning abroad, or remaining at home. Noncitizens/green card holders are separate.
FATCA laws are about how to report your taxes, not how to use your account. “How” questions are up to the account’s country, not yours.
To comply with FATCA’s reporting obligations, you might need to fill out the following:
- IRS Forms, usually Form 8938. Even then, the lowest number you’re obligated to report is at the $50,000 mark for unmarried or single-filing individuals. You may not even have to worry about reporting, but of course don’t assume--check.
- Other forms from an agency known as FinCEN. FinCEN’s website lists their requirements and who must file clearly and plainly.
Laws covering your account’s use are the foreign country’s laws on the topic. To be certain of your own compliance, check the laws in the country hosting the account.
FATCA is still mostly for the foreign banks, not U.S. Citizens.

If you’re ultra-curious about the tax law, our research team found the most palatable article on the subject straight from the horse’s (read: IRS’s) mouth. Our writing team found you the most tolerable yet comprehensive explanation from IRS.gov. Even though they’re pros, read it at your own risk. It’ll likely collect dust in your bookmarks, unless you’re a CPA/financial pro. In which case you may be in for a riveting night of hot, fascinating intimate IRC details.

Is Offshore Banking a Form of Tax Evasion?

Certainly not, because tax evasion is a crime. Again, there’s nothing criminal about using an offshore account on its own. There is, however, a grain of truth to these suspicions.

Some Americans have mismanaged their accounts into illegal situations. Still others have exploited the asset protection gifts of offshore banking for blatantly selfish/immoral personal gain. In 2009, the U.S. Department of Justice took action against several institutions that were conspicuously setting up accounts and essentially advertising to global citizens seeking to outrun the Taxman. These actions preceded FATCA, which if you follow to the letter and don’t commit criminal offenses, makes your offshore account no more significant than any of the millions that other investors lawfully use.

News reports of individuals committing tax evasion might be true. You’re safe as long as you don’t join in. Or attempt to hide your banking activities from Uncle Sam if FACTA says you shouldn’t. Avoid those two things, and you’re set.

Staying on the Right Side of the Law With Your Offshore Bank Account

Since American law doesn’t say much of these accounts, it’s easy to comply. Provided you’ve followed the advice above, are complying with FACTA, and have at least one attorney and CPA on your side, you’ve got everything you need to get started offshore banking fearlessly. Heck, some of these banks will take as little as $500. If legalities are your only concern, you can stop worrying today and start considering your options--and helping pros.

What Is Corporate Compliance and Why It’s Important For Investors

If you go through the effort of forming, building, and growing a company, you want to be sure to do everything you can to protect your business. One thing you simply can’t afford to ignore as a business owner is compliance. Let’s talk a bit more about what corporate compliance means, involves, and looks like.

What is Corporate Compliance?

Broadly speaking, corporate compliance describes how closely your company adheres to the law and any other policies it should be following. You can break it down into two basic categories:

Internal compliance. Founding documents, company policies, and operating procedures fall into this category.
External compliance. This type of compliance relates to the laws, ordinances, and any other regulations from other bodies you must follow. For investors with property in multiple states, you may be dealing with multiple state-level agencies for compliance reasons.

Internal and External Compliance: What You Actually Need to Worry About

And don’t worry, that headline’s not a tease. We’re seriously going to show you how to not give a single solitary F-bomb about compliance.

Internal compliance matters because it allows you to control your “in-house” liabilities, such as setting up the proper type of company, asset protection, contractor and property manager issues, and much more about your day-to-day.

External compliance, on the other hand, is more focused on the legal pieces of your company needs. This is just one of several reasons why attorneys offer services to assist. Attorneys can help you satisfy the most critical pieces of external compliance, which in our opinion are:

Federal law compliance. Obviously we keep the Department of Labor and Taxman happy as investors. The reasons should be fairly obvious, and we can prevent lawsuits on matters like housing discrimination by being familiar with legislation like the Fair Housing Act. We’ve actually authored some educational pieces on understanding how the Fair Housing Act affects lawsuits, liability, and your daily operations.
State law compliance. State laws determine which entities you can access most easily and which will ultimately offer you the greatest protections. You may wish to form out-of-state based on your lawyer’s advice, because other states may be friendlier to real estate investors like us. Yes, we’re all investors too.
Local ordinances and regulations. Local law seems silly but can screw you over if you get it wrong. Chat with another local investor for free advice, or rub elbows with a local pro at a networking event to get some free tips on “stuff you didn’t know about your city’s rental property quirks.”

Of course, pros are happy to give you tips too, but generally good ones don’t do it for free. Paid consultations give you a competent real estate support team. This is especially important for ...

Tax issues. Technically this is federal law too, but since you’ll also need a CPA if you’ve got specific enough concerns, we’re separating it out here so you won’t forget. Keep Uncle Sam happy. He’s a real G about getting his money. He will get it. You can’t outrun him, not even internationally. And he WILL enforce collections the dirty way. Keep your taxes clean, friends. By any means necessary: Excel, Turbotax, CPA, little envelope-back calculations, standing on your head while you collect receipts, praying to Our Lady of Perpetual Exemptions, or whatever works for you.

Both concepts of compliance are vital and can be offerings of full-service corporate compliance firms or agencies. Let’s dive into why you might think about using one, and your alternatives if you’d rather not pay.

Why Your Company’s Compliance is Crucial

The consequences of noncompliance aren’t pretty. What consequences will depend on the severity and type of noncompliance, but none are pleasant. If your LLC is noncompliant because you got a LegalZoom or similar company’s weak cookie cutter LLC, it may be totally useless as a business entity and thus offering you no real lawsuit protection. With so much on the line, why play around?

Corporate Compliance: The Real Estate Investor’s How-to Guide

While all of these rules and regulations may seem like a drag, fortunately, you don’t have to wade through all the legalese and paperwork on your own. Professionals can help you be certain of your company’s compliance, with many offering specific corporate compliance services. Let’s talk about what these services look like in real life.

Real Estate Compliance Options

Generally, here are the kinds of services you can purchase from full-service firms. The value of a full-service firm is greater for real estate investors who have more expensive time. “Expensive” by the way can be measured in numbers for most of us. Look at what you average as an hourly rate and decide if putting even one or two hours of time towards compliance is “worth it.” If you can’t get the job done for under $100-300, you absolutely want to think about full-service. Even if your hourly rate is $20, that gives you five hours a year to devote to compliance. The idea that compliance services are for “rich investors only” or those who are well on the way to success is BS, to be blunt. Here’s the quickest, but not only, reason why.

You can pay a full-service legal firm (not an online LLC-in-a-box shop because lawyers are more effective than LegalZoom or template companies, always) very little money to have them address that list of obligations above. Moreover, investors who purchase a compliance package usually get these things:

Peace of mind. Your work’s being done by actual trained real estate attorneys or other types of real estate experts if you choose pros wisely.
Flexibility. If you just need tax services from a real estate-experienced CPA, for instance, this is usually an option with firms familiar with investors. This piece can be cheap or nearly free, or you can spend a little bit more for more services. Many firms (and we’ve joined this party too) are embracing a la carte financial, legal, and tax services. You can pick and choose what you need, and get a few things you may need someday on top, depending on how much time you’re willing to put into shopping. Again, would you rather spend an hour learning about this type of quick, easy-to-read info and comparing your options or trying to learn law, tax, and financial strategy all at once? Unless you simply enjoy pain, the choice is a no-brainer.
Financial degrees of service. If you’re skilled in compliance say, because you’re a real estate agent, CPA, or lawyer (thanks for reading, by the way--we love our attorney readers!), you can save serious cash by DIYing the services you provide and simplifying paying for the rest.

Living Trust Versus A Will: What’s the Benefits For REI?

Many investors don’t even know how crucial it is to have an estate plan. While planning for the unexpected is uncomfortable at times, it is essential for all of us. Yet the real estate investor has even more reason to be vigilant about estate planning. Whether you own a single investment property or an impressive and costly portfolio, surely you want your real estate assets to be passed onto your loved ones and chosen heirs.

Today we will focus on some common FAQs about two of the most well-known estate planning documents: wills and living trusts. Read on to learn about what these legal documents have in common, what they do differently, and what these tools really look like in action.

If you don’t pick out your heirs, the U.S. government is all too happy to hang on to your hard-earned assets and find a use of their choosing for your valuables. Even investors with no family can likely think of a cause closer to their heart than Uncle Sam. Still, brilliant people with legal access die without estate plans often. Why? We have a pretty good working theory.

Death isn’t fun to acknowledge or look at, let alone admit will happen to us. But we can’t change its inevitability. That part is beyond our control. So, we turn our focus to what we can control. What we can do is take control of our legacy today and ensure our desires will be carried out no matter what.

The benefits of estate planning include giving you power now, while you are alive. Planning gives you the peace of mind of knowing that even if misfortune strikes, your business will live on and your chosen heirs will be taken care of. It takes some of the fear, and the sense of “forever,” out of death.

The Basics: Wills Vs. Trusts

Let’s start at the very beginning. For our purposes, that means making sure we are clear on what these estate planning tools are and what they do.

Breaking Down Wills

There are many different types of wills. We raise the issue to make the point that when most people think of a will, they are usually referring to the most common and easiest type of will for the average person to draft, a variation on the Simple Will. The requirements for and components of these wills are straightforward:

Created when you are of sound mind.
Give a complete list of assets and heirs.
Specify who gets what.
Name an executor to carry out your wishes for you. Choose your executor wisely, and understand their job.

Wills aren’t bad, but they can cause problems when relied upon alone. These criteria may seem basic, but every single one can go awry. Even the first can be challenged after your death. So, let’s look at the living trust to see what it has to offer.

Breaking Down Living Trusts

Living trusts are established by private trust agreements. This type of revocable trust is one you can form today, but deed property titles into for years to come. In this sense, it’s also an asset protection tool. Living trusts also allow you to name a trusted confidant to manage your real estate assets if you ever can’t while alive, say because of a medical emergency. Perhaps most importantly, because this tool avoids probate, your heirs will receive their share far faster with no surprise fees.

Similarities Between the Will and Living Trust

Essentially, each of these options gives you a legal way to direct where specific assets go upon passing. Both also allow for the possibility of naming a guardian for minor children. A will has this option, while a living trust would need to be set up properly (in conjunction with a pour-over will) to achieve this goal.

The similarities end there, however. Let’s take a look at the crucial differences between these tools before exploring which option is best for the real estate investor.

Differences Between the Will and Living Trust

There are many crucial distinctions between the living trust and the will. The differences touch on everything from legal and business differences to the costs you can expect to pay for your estate plan.

Wills must be probated, while living trusts bypass this process. The living trust offers greater anonymity for real estate investors, even after their passing. Your heirs will also benefit from this privacy. Probate court records are public, while trust filings are private. The probate court would never be involved in handling matters pertaining to your trust. Where a will names an executor, a living trust names a successor trustee. While both are involved in administering the estate, your trustee’s actions aren’t in the probate court’s purview.

Wills may be cheaper upfront, but you get what you pay for. The money you “save” could lead to more costly heartache for your heirs, particularly if you truly cheap out and write it yourself. Resist that urge. True, living trusts are more expensive to establish, but you’ll be far more protected. They can’t be contested or held up in probate court for months, even years--a fate all too normal for those who die with only a “Last Will and Testament.” Your heirs won’t have to worry about paying out lawyers and accountants or fighting for their fair share if your living trust leaves no room for ambiguity. This is just one more reason to get professional help for your estate plan.

Which Tool is Best for the Real Estate Investor?

Because of the additional benefits conferred by the living trust, we often recommend that our real estate investor clients use this tool instead of a traditional will alone. While we’ve hit on the basic features, an example may help illustrate the differences in real life.

Example: Meet The Identical Twins With Different Estate Plans

Amy and Caroline are 36-year-old identical twin real estate investors. The twins got started investing together, even splitting profits and losses. They grew their businesses, yet happened to always have the same number of assets, each with the same value.

But Amy and Caroline didn’t do everything exactly the same. Although their financial conditions and portfolios were dead ringers just like the sisters, the women disagreed about how to handle estate planning. The two made their appointments to address the issue the same day. Each sister had five chosen beneficiaries, but neither included the other.

Amy read online that the will is the oldest and most accepted document available, and partially to save money, she used a consultation with a lawyer to draft a will. She spent some time googling a cheap attorney, and found one who agreed to create a document that listed her existing assets. The price was right and she felt secure. “I’m young,” Amy reasoned: “I’ll update it later.”

Caroline, however, is more cautious. She spent more time researching her options and learned about living trusts and estate planning for real estate investors. She spent some time looking for references for an estate planning attorney with real estate experience, narrowed down her candidates, and opted for an attorney who was also an investor. This lawyer spent some time with Caroline looking at her full situation and providing thoughtful feedback. He agreed to form her living trust and advised that she use a pour-over will, a tool which ensured all of her assets would be added to the living trust. She spent more upfront than her sister, but also would not need to come back to update a will (and pay the necessary legal fees) like her sister would. Caroline also took advantage of the lawyer’s estate planning review services, which meant her lawyer ensured compliance and made suggestions twice annually.

What Happens if Tragedy Strikes?

Now let’s see what would happen for our sisters if they were to pass away suddenly. No actual twins were harmed in the making of this example.

Five years after drafting her will, Amy has essentially forgotten about the document. During those years she got married, had two children, acquired three new investment properties, and got busy with life. She is driving to work on an uneventful morning. Out of nowhere, her small sedan is T-boned by an 18-wheeler. She passes away immediately upon impact. Amy’s five-year-old will is her only estate planning document.

First, her will would have to be probated no matter what. Things get darker, though. She listed beneficiaries before her marriage and kids existed, and while there are legal ways to sort these things out, they are expensive and time-consuming processes for her already-grieving family to handle. Further, not all of her assets are accounted for in that will. The investments she had purchased since weren’t listed because the will wasn’t updated, creating yet another issue for the court. Sorting out these details usually means legal and accounting fees are deducted from the estate while the heirs, both listed and presumed, wait. Sometimes they fight. Amy’s family would be in a much better position if she had followed her sister’s lead.

Suppose Caroline also started a family and grew her portfolio in the five years since making her plan. Now let’s suppose she’s fatally struck by lightning. Her heirs won’t be attending probate court like Amy’s, because she used the power combination of a pour-over will, living trust, and closely involved attorney. Her family was included in her trust agreement, and even though her last investment hadn’t been formally listed in her documents before she passed on, the pour-over will ensure all assets went into her living trust for distribution.

You Can Have it All: Using a Pour-Over Will With a Living Trust

While a living trust clearly beats a will alone, the pour-over will combined with a living trust is the gold standard for the vast majority of our clients. The pour-over will is superior to the simpler will solution mentioned above because it accounts for all assets you control at the time of your death. Any you hadn’t added are “poured” into your living trust, offering a smooth business transition option that also takes care of your heirs.

To learn more, check out our article, What Is The Difference Between A Will And A Trust?

Asset Protection Structures: 3 Benefits (Plus The Best Entities For REI)

The following is a discussion of both the most common perks of an asset protection strategy as well as the benefits that you can start enjoying at any time. Your customized plan will depend on the asset protection structures that you and your team of qualified professionals decide are best for you.

3 Benefits of Asset Protection Structures

Your "structure" (or your business entity and how you set it up) typically conveys several benefits at once. The most common asset protection structures we recommend for our clients are the series LLC, a Delaware Statutory Trust for the Californian investor, or a network of a traditional LLC and an asset-holding company. All of these structures give you some unique freedoms and avenues for defending your assets.

#1 They Organize Your Business

Operating your real estate business as a sole proprietor has tons of disadvantages. As asset protection professionals, the first threat we think of is the threat of lawsuits. The easiest way to make yourself a target and your property vulnerable is to own investment property in your own name.

Using an entity can streamline your real estate investments, or truly, any business that you choose to operate with these structures. Some have legal requirements that require organization, but in general, we find that the entities used for asset protection also make running a business easier.

#2 They Compartmentalize Your Asset Protection Plan

Ideally our assets are compartmentalized, meaning that they are separated legally from one another and you personally. Your entity is typically your best tool for compartmentalizing assets.

The optimal way to protect assets is with Limited Liability Companies that “stand in” as the owner of the property. Of course, you control the company. The beauty of LLCs is you can form as many as you like, preferably with each holding a single asset. Both the the series LLC and Delaware Statutory Trust for California investors make compartmentalization easy. In the case of the series LLC, each asset simply goes into its own series.

Unlike the traditional LLC, investors can leverage the series LLC’s scalability to minimize the cost of compartmentalization. At Royal Legal Solutions, we love teaching investors how easy it is to create a new Series Document from home. Many of our clients have been empowered to create their own series at any time, on their schedule, from the comfort of their homes.

#3 They Limit Your Asset Liability

You may be wondering why there’s so much talk of types of limited liability companies in the asset protection world. These types of companies, including the series LLC variation, are designed to remove your personal liability. Because of their legal protections, LLCs offer an elegant solution for basic lawsuit prevention for real estate investors. From a legal perspective, if an opposing attorney can’t make a good case for “piercing” your corporation (a possibility we can anticipate and prevent by deploying certain tools and tactics in the set-up phase of an asset protection strategy), your assets are safe from seizure.

Why? Because for your assets to be seized, an opposing lawyer would need to secure a judgment against you. For that to even be a possibility, that hypothetical attorney must connect you to the property and the liabilities to the property. Our asset protection plans can thwart every step in this process, to the point that we can make it nearly impossible for the lawsuit to even be filed at all.

Enjoy Real Privacy: The Value of Anonymous Structures

The best asset protection plans take advantage of every opportunity to secure an investor’s anonymity. Attorneys can use tools like the anonymous land trust to ensure your name is nowhere to be found on public records.

In addition to fortifying your asset protection plan by helping prevent lawsuits, preserving your anonymity is also a reliable way to protect yourself from the threat of identity theft. In the digital era where all of our information is easily stolen, it is critical that investors and high earners protect themselves—and their personal information. Be cautious of who you give information to online. Many scammers have convincing, professional-looking sites designed exclusively for stealing private information.

The Relief of Being Truly Judgment-proof

A properly configured asset protection plan can make suing you nearly impossible. That is part of your attorney’s job: to get you the structures you need to never worry about lawsuits again.

The only way to design the perfect plan for you is to work with a reputable real estate asset protection attorney. Your lawyer should take your entire personal situation into account, get to know you and your investments, and make a tailored plan for your circumstances. After all, what works for one investor may be useless to another.

What we know from talking to our clients is that the peace of mind of not living in fear of a life-ruining lawsuit is worth it. Lawsuits are among the most stressful life events a person can experience, right up there with death and divorce. But unlike the latter two unfortunate realities, lawsuits can be prevented.

The smart play is to be proactive, and create your asset protection plan before there is ever even a potential threat. Take action now, and you might never have to see the inside of a courtroom.

Three Ways to Properly Legally Protect A Personal Residence

We talk all the time here on the Royal Legal Solutions blog about the importance of legally protecting your real estate investments. Far less online material is devoted to the asset protection of personal residences. Those investors who are newer to asset protection may be wondering what, if anything, we can do for our homes.

I can hear some of the more seasoned investors shouting at their computers now: “But there’s the homestead exemption!” Great point. The reality is that your homestead exemption is only as good as the state you live in, meaning it’s not universally useful. It is also only one of the top four tools that you can use to defend your personal property.

Apply for a Home Equity Line of Credit (HELOC)

The HELOC is a relatively easy-to-obtain loan that is secured by the equity in your home. In other words, it’s a harmless type of debt. The application and qualification process is straightforward. Using a HELOC is a tried-and-true tactic for making a residential asset unappealing to pursue in a lawsuit. Creditors, too, will often back off when they see the home’s equity is securing a debt. Fortunately for you, the property looks less attractive to creditors the moment any type of debt is associated with it.

Use a Qualified Personal Residence Trust

These estate planning tools are a lesser-known type of trust originally designed to minimize gift and estate taxes, though they also offer certain protections. These trusts work through provisions allowing an investor to continue occupying the home for a specified period of time, after which the residence will become the property of his or her heirs. This method has the added benefit of keeping the value of the home out of the taxable portion of your estate.

Get The Most Out of Your Homestead Exemption

Just because homestead exemptions are not all created equally does not mean they are worthless. There is no reason that you shouldn’t do what you can to maximize your homestead exemption. If you aren’t sure where to begin, consider checking with a qualified CPA that has real estate knowledge. That CPA may be aware of deductions and have other ideas for minimizing your taxes as well.

Concerned About Personal or Business Assets? Royal Legal Solutions Can Help

If you have concerns about protecting your personal or business assets from lawsuits, know that you don’t have to. The asset protection pros at Royal Legal Solutions are here to help you figure out the best plans for your needs, as we have for so many other investors around the country. Take a step towards more security by scheduling your personalized consultation now.

Custom Asset Protection: Investing in Texas Vs. California

Imagine making an appointment at your family doctor’s office. After driving to the appointment and a brief stint in the waiting room, the doctor calls you back to his office.

Before you can even open your mouth, he informs you that you’re scheduled on surgery for Monday.

You haven’t told him why you’re there. You could have a cold or need a physical for all he knows. But he’s giving you a treatment already—and an expensive, invasive one at that.

Most of us would be confused and outraged at this bizarre behavior. We would want to know why the doctor was making this decision.

So you ask.

The doctor informs you: “This is the treatment I’m giving all of my patients now, regardless of who they are or what their ailment is. You’ll be fine!”

Would that comfort you at all? Of course not.

You need a treatment customized to your problem and your unique circumstances. One-size-fits-all treatments would hurt more people than they would help.

The same is true in the nuanced, complicated, and personal world of real estate law. So why would we expect a one-size-fits-all approach to work any better for asset protection?

In short, we shouldn’t. Assuming the same tactics will work for everyone is using the same type of thinking as assuming the same medication will cure every illness. Furthermore, a cookie-cutter approach to asset protection is a mistake that can undermine its purpose.

The Importance of a Customized Asset Protection Strategy

Your asset protection plan should be tailored to you, your needs and your goals. That means your lawyer should be using the most suitable tools available. This means he or she must have an intimate understanding of your situation.

Some of the things that can influence which tools are best for you include:

Where you live (which states allow anonymous LLCs, for example)
What kind of properties you own
How many properties you have
Where your properties are located
Whether you are married
What goals and personal ambitions you have for your real estate business
How quickly your business is growing
How much you are making off of your investments
What other sources of income you have
What your tax needs are
What other financial considerations you may have

And that’s actually a pretty short list, considering that it is far from exhaustive.

Case Study: A Tale of Two Investors

While it is true that there are best practices in asset protection, creating a plan that will work best for every investor is impossible. Even when two situations look an awful lot alike, one small detail can make the difference between a sound asset protection strategy and an unnecessarily expensive or ineffective one.

Let’s look at two investors who seem similar at first, but who saw very different outcomes with the same plan.

Luke Sloan is a 35-year-old tech sector employee and real estate investor in Austin, TX. Luke has three passive investment properties and plans to acquire a fourth. After attending a seminar with his brother where he learned the dangers of keeping these properties in his own name, Luke read about the Series LLC as an option for limiting his liability and preventing lawsuits.

He consulted with an attorney who was experienced in forming Series LLCs. He checked out his attorney’s website and saw authoritative content on asset protection and a wide range of offerings, and looked into his attorney’s reputation to find it was positive. Luke’s attorney guided him through the process of forming a Series LLC and transferring properties into it using land trusts. Luke’s attorney also educated him on how to use his entity, and how to form additional child series when Luke acquired new properties.

Luke’s brother, Eli, is also a real estate investor. He is a 38-year-old passive investor with a day job in the technology sector in Silicon Valley. They have roughly the same income.

Also like Luke, Eli has three properties and wants to protect them from lawsuits. It occurs to Eli that perhaps he could save some money on legal fees by duplicating his brother’s plan with the cheapest means possible. Surely with so much in common, down to their tax bracket, these two brothers could use the same asset protection strategy, right?

Wrong. Even if Eli got an attorney to create a carbon copy of his brother’s plan, it would leave him with an unpleasant surprise.

Can you guess what it is?

It’s okay if you can't. The difference is subtle.

Although they’re otherwise alike, Luke lives in Texas while Eli lives in California.

The Series LLC is a great entity for investors in most states, but it is not generally the ideal for California investors with multiple properties. If Eli went through with that plan, he would owe $800 in franchise taxes per series to the state of California (so, $2,400). That figure would rise with each newly acquired property.

There is a better solution for Californian investors like Eli: the Delaware Statutory Trust.

Again, it’s okay if you didn’t know that. It’s probably not your job to know it. An experienced asset protection attorney, however, would certainly be aware of this fact.

The really expensive problems begin when investors like Eli attempt DIY asset protection. Even small mistakes like using a cookie cutter entity from an online service can undermine the entire purpose of an asset protection strategy.

Three Reasons to Start a New Business After Retirement

There are many compelling reasons to operate a small business in retirement. It’s a great use of your time, a productive application of your mind, and a gateway to financial opportunity. For today, let’s talk about three top reasons to consider starting a business in retirement.

Fill Your Spare Time With Fulfilling, Productive Activity

Going from working every day to doing nothing would be a shock for most people. So is it any wonder that early retirement feels, for many, like having all the time in the world? For someone who has worked their entire life, such an adjustment is often too harsh. Many of our clients solve the “time” problem with a small business, as it also has the benefit of added income.
Having a small business is also a great thing to occupy your mind with. Some individuals are tempted to spend indulgently in early retirement. Often, this is a byproduct of simple boredom, a boredom that can be eradicated entirely by operating a small business premised on a hobby or talent. Focusing the mind on a healthy and positive routine can prevent it from wandering towards more destructive patterns.

Mitigate Risk in Retirement

With your basic needs covered, retirement is an ideal time to experiment with how you invest and generate long-term income. Operating a small business is one great way to engage in both activities at once.

One common question investors have is how to get started. It’s simple: locate an idea, service, or product (whether your own or someone else’s) that resonates with you. Some investors who want to start small will capitalize on a hobby, like the investor we know who creates fishing lures and sells them to his fellow fishermen.

Understand that there are ways to determine how much risk you will tolerate, and operate within those margins. It’s okay, and even recommended, to know going into any kind of investment how much you’re willing to risk and under what circumstances.

Have Some Small Luxuries and Comforts

The extra money is the obvious reason to keep a business going in retirement. But it is true that small expenses can contribute substantially to your quality of life. What that looks like will be a little bit different for everyone, but for most of us it’s some variation of freedom.

Final Tip: Get Help From Retirement Planning Professionals Before Making Major Changes

Starting a new business is a great example of a change to your retirement plan that your professionals can assist you with making in the best way for you. It is never a bad idea to run such changes by your legal and tax professionals. We advise our own clients on these matters often.

If you are considering establishing a retirement plan or making major changes to your own retirement plan, such as adding a new type of self-directed account or starting a new business, we are happy to offer our guidance. Feel free to contact the professionals Royal Legal Solutions today. We can answer your questions or set up your personalized retirement planning consultation.

Joint Venture Liabilities Likely to Get You Sued

Freddy Stein is an active real estate flipper making big moves in the Atlanta market. He currently has four properties he’s rehabilitating, all held under his corporation.

Bad idea! We always recommend that our clients hold each property in a separate LLC to insulate them from each other. The way Freddy’s business was set up, a lawsuit could wipe out all his investments in one fell swoop.

Apparently, his quack of an attorney had advised him not to complicate his business structure. The attorney argued that:

The additional expense of creating the LLCs was unnecessary.
The LLCs will each need a separate bank account.
The LLCs will need separate accounting.

It was bad enough that the attorney did not understand the basics of asset protection for real estate investors. Worse yet, he did not understand investing.

Freddy was using money from private investors to finance his deals. This meant that if Freddy’s business got involved in a lawsuit and lost, there was a chance of losing all his property and the investors' money. This would then lead to each of his investors suing him for the lost money. Common situations like this are why any real estate should consider using separate LLCs when dealing with Joint Ventures. And yes, there's more.

There are even greater Joint Venture liabilities lying in wait for Freddy and other investors.

Liability Risks Associated with Joint Ventures

When you enter into any type of Joint Venture in real estate investing, you are basically in a partnership. For this reason, you have duties regarding how you treat your JV partner(s). A breach of any of these duties can result in liability for you and your business.

Good Faith and Fair Dealing

This obligation begins with the Joint Venture offer to third parties. It continues throughout the agreement until the property is sold.

Loyalty to Joint Venture Partners

You must always place the business or personal interests of your Joint Venture partners above your own. You must steer clear of situations that might cause a conflict of interest or self-dealing for your personal gain. In a business such as Freddy’s, it is very easy to fall into conflict of interest traps. One of the partners could claim Freddy never devoted his best efforts to their deal because other Joint Venture deals under the same company were more lucrative. While he could argue that he’d never do such a thing, the investor's perception alone can motivate a lawsuit.

Freddy could point out that he did not disclose his other Joint Venture arrangements with his investors. This is a breach in itself because he did not disclose relevant information to the other partners.

Duty of Care

This requires that you act reasonably, in good faith, and without conflict of interest when making decisions for the business. For Freddy, there is a glaring conflict of interest when he’s trying to manage three Joint Ventures concurrently. In his current arrangement, he is managing all his joint venture contributions, income from the sale of property, and property expenses via one bank account.

Joint Venture liabilities may arise regarding the use of the joint venture funds for other investors and personal benefit to Freddy.

The truth is, lawsuits are not exclusively centered around issues related to business assets. They can also be fueled by how a business is run. Freddy’s business is currently a legal disaster waiting to happen. Joint venture investors like Freddy should structure their businesses inside LLCs instead. Doing this can limit these liability risks and prevent potentially ruinous lawsuits.

4 Levels of Asset Protection for Real Estate Investors

Are your kids eyeing that expensive out-of-state college?

Do you want to see a larger return on your individual retirement account (IRA) investments?

Or do you want to quit working your 9-to-5 and start earning a profit on your own?

Whatever the reason, if you are looking to diversify your investment portfolio, real estate is a great start. However, this is a business that can bring you serious legal and financial headaches. That's why asset protection for real estate investors is so important!

Think about it: A simple slip on your property can lead to a court ruling that bankrupts you. A typical judgment will take into account medical damages, pain and suffering compensation, as well as other necessary expenses the injured party faced.

Your overall net worth will also be examined under the microscope.

Below, we take a look at the best ways to protect yourself and your real estate assets from court rulings and expensive judgments.

Understanding Your Current Real Estate Liability

When it comes to investing in real estate, your liability can land you in court. Regardless of the root cause, if you are found to be liable for damages or injuries – a lawsuit will likely follow. This is because, per the legal definition, liability means that you are responsible, or answerable, to the law.

Most lawsuits end with a settlement or judgment. In other words, the majority of lawsuits will result in you having to pay for whatever damages have occurred. When it comes to real estate, most of liability lawsuits result from accidents. (Of course, other lawsuits, such as fraud, do exist as well.)
By definition, accidents are something you typically do not anticipate. Unfortunately, that does not clear you of your liability. However, you can protect yourself and your assets from such lawsuits in several ways. This includes:

Insurance
Compartmentalization
Separation, or Shell Companies, and
Anonymity

To figure out which protective actions you should take, let’s examine each of these individually. After all, every piece is unique and deserves a careful evaluation when you are building a real estate empire.

Is Real Estate Insurance Enough Asset Protection?

Consider insurance to be supplemental to the other ways to protect your assets we'll look at.

Insurance is your first line of defense when it comes to protecting yourself. There are limitations and benefits to the various insurance plans, so make sure you find one that works for you. Basics typically include accidents, like slips and falls. (If the accident is questionable, your insurance company may debate it with you. In most cases, the insurance company wins! So make sure you understand the scope of your policy!)

Typically, insurance providers will refuse to cover several different scenarios. Gross negligence is a big one. If the insurance company believes the accident was caused by something you “should” have known was an issue and did not fix, the fault is yours. Insurances also come with different coverage amounts. The majority of large judgments or claims, for example, will not be covered by the standard insurance plan. Financial disputes between contractors, venders or other such suppliers are not often covered by your insurance either. Oh, and a tenant dispute that involves things like liability, discrimination, rent or evictions? The majority of insurance companies will deny you coverage.

Example: In an ideal world, your insurance will cover damages before a lawsuit is even thought of. For example, a short-term injury caused by a slip and fall has an average settlement of $10,000 to $15,000. While a check for $15,000 seems like a lot, your insurance likely has a much higher ceiling. If this is the case, they will likely pay this amount and the case is closed. However, should a tenant fall from a balcony on your property and suffer serious, long-term injuries, the settlement will likely be much higher. Your insurance company will then investigate the fall, including the railing, regulations, and reason for the fall. If they feel the rail was not properly secured, or it was an inch below new state regulations, they will deem you negligent and refuse to pay the settlement. It will not matter if your tenant was inebriated or sleep walking once your insurance company finds you negligent.

At the end of the day, insurance is a proactive asset protection supplement. It can help mitigate some of the damages financially so long as they fall within your insurance coverage. However, because of the loopholes, it should not be your only means of protection.

Compartmentalization Of Your Real Estate Assets

Compartmentalization means that you separate your real estate assets from risks and liabilities that can cost you money. One of the best ways to do this is to establish a limited liability company (LLC) for each asset. These are called Series LLCs. They provide boundaries between assets and prevent lawsuits or judgments against one LLC from being able to take from another.

To understand how a LLC helps protect your real estate assets, let us first look at the benefits of the LLC itself. If you were to directly invest in a property, you and your personal finances would be subject to any court judgments. That means you could lose your home, car, bank savings, and other investments. In contrast, if you use a LLC to invest in a property, only the assets owned by that LLC would be subjected to any judgments. (In this sense, let us think of a LLC as a barrier wall. Anything outside the wall is considered off limits to the court.) Other advantages of forming an LLC for your real estate investments include less paperwork, less meetings, pass-through taxes, and flexible management and profit distribution.

Example: You’re a conqueror. You see potential in each of your real estate investments. As you invest in each property, you expand your real estate kingdom. Some you purchase in pristine condition. Others, well – they need a bit of work. Buying property is risky business. After all, there are inspections to pass, repairs to be made, and regulations to comply with. To help protect your assets from legal actions, you purchase each with a different Series LLC. Like the battle mounts around a castle, your Series LLC builds a wall around each of your investments. One of your tenants falls from a balcony on Property A (owned by Series LLC A). As the tenant, their lawyer, and court wages war against your kingdom, the walls protecting your other properties are impenetrable. Whatever the lob at the walls around Property B, C and D, you can rest assured nothing will get through. The only course of action they have is to go back to Property A and assess the worth of everything contained within the walls.

Limited liability. That is the magic phrase here. Because you cannot plan for every accident, investing through a LLC helps to limit your overall liability. Forming Series LLCs to isolate each asset from each other further protects your net worth. Why? Because each LLC builds a wall around the assets it owns. If a tenant slips on ice on one property, a Series LLC will ensure the courts can only gauge that specific LLC’s worth when establishing a judgment.

Legal Asset Separation (Use Of Shell Companies)

A shell company is the face of your business. It owns nothing, but legally appears to operate everything. Consider the traditional LLC to be an example of a shell company when it is owned by an Anonymous Trust. (We’ll talk most about these trusts in a moment.) As with a Series LLC, the traditional LLC allows you to keep your personal and business assets separate. This legally obscures your net worth. Additionally, it helps to insulate you from having your personal finances garnished if your business must declare bankruptcy or defaults on a loan.

Example: You’re still a conqueror. However, you build your wall around the entirety of your real estate kingdom this time. After your tenant falls, their legal team rides from village to village, pillaging your assets and reaping the benefits of your total real estate worth. If you have one property, however, they remain contained within a smaller area, unable to touch your personal assets outside of the wall.

If you only plan on investing in a single asset, the traditional LLC provides ample asset protection. It offers the same advantages of a Series LLC, however it provides you with only one barrier that contains all of your investment assets. This means, if an incident on one of your properties lands you in court, all of your business assets may be in trouble.

Assets Shielded By Anonymity

Anonymity is another layer of protection that can help you sleep better at night. To achieve true anonymity, we often advise clients to establish an Anonymous Trust before creating any type of LLC. Why?

An Anonymous Trust, also called a Land Trust, is made up of three parts. These are the grantor, trustee and beneficiary.

When you decide to establish an Anonymous Trust with my company (Royal Legal), we become your designated “nominee trustee” and file the required paperwork for you, thus eliminating your name from the records. Once filed, we resign as the trustee and you become the designated sole trustee.

This means that your name is never filed with the clerk. This makes it incredibly hard for lawyers to connect your Trust to the LLC, and thus, to the property.

Because your Anonymous Trust can then create a traditional or Series LLC, your name continues to be obscured. (An LLC will need to disclose the names of its members when it files its Articles of Incorporation with the state clerk. However, when an Anonymous Trust owns the LLC, only the name of the trust is listed in this document.) By adding this important layer to your asset protection plan, you can shut a lawsuit down before it is even filed.

Example: An anonymous conqueror makes the most of their kingdom. After all, who can the tenant and their legal party attack when they cannot figure out who is running the show? However, you decide to operate your kingdom, whether through a single wall or many, your crown sits securely in your safe, where no one knows to look.

Layer Your Assets With Protection

In 2001, DreamWorks’ Shrek told us, “There’s a lot more to ogres than people think. Ogres are like onions…Onions have layers. Ogres have layers.” As a real estate investor, you should too. We recommend a three-layer approach to real estate investing.

First, you should always obtain an insurance plan that covers what you deem important. After all, an insurance payout may be enough to stop a lawsuit before one is even considered.
Second, you should establish an Anonymous Trust. This entity will obscure your identity and help keep your net worth from being discovered. It can also prevent a lawsuit from occurring because of the difficult legal obstacle it automatically creates for a lawyer considering the case.
Third, through your Anonymous Trust, you should form a traditional or Series LLC. This choice is strictly based on your needs and future intentions. As stated above, if you are only looking to invest in one piece of property, a traditional LLC is great. However, if there is the possibility of investing in multiple properties, you should strongly consider a Series LLC. Doing this allows you to compartmentalize each asset into a different LLC, keeping each safe from the others should a lawsuit occur. (If you form a Series LLC with our help, the entire structure is scalable at no extra cost to you!)

The problem with using only one level of protection with real estate investing is because of the dynamic nature of real estate itself. After all, most real estate lawsuits stem from accidents. Because you cannot plan for every potential accident, having layers ensures you remain protected no matter what happens. From lawsuit prevention, like acquiring insurance, to creating a legal obstacle course, like an Anonymous Trust, to help discourage lawyers from picking up a case – layers help stop a lawsuit before it starts. However, should a lawsuit actually occur, establishing boundaries through a traditional or Series LLC can help to minimize any judgments and protect your personal and business assets.

Have Confidence in Your Real Estate Asset Protection Plan

We want your real estate investments to be successful. To do this, you have to look at the bigger picture. This includes figuring out the best way to protect your real estate investments, your personal assets, and your name. Through years of experience helping our clients avoid lawsuits, our three-layer approach to asset protection has proven itself to be invaluable. Best yet, our experts streamline the process to ensure everything flows smoothly. We can help you set up an Anonymous Trust and establish your desired LLC structure. Alternatively, if you already have an LLC, we can assist you with rolling over your direct ownership to an Anonymous Trust to give you another layer of protection. If you would like to learn more about how we can help you keep your real estate assets protected, contact us today.

Ways to Protect Your Assets as a Real Estate Investor

If you're a real estate investor, you need ways to protect your assets.

A common asset protection strategy for a is to have one property per LLC.

That makes sense because if you have a lawsuit with one property, you don't want it affecting your other assets. That limits your downside risk. So in this situation, we have one LLC with one property held inside of it. We have a completely different LLC with another property held inside of it.

This is a great situation if you have a lawsuit that's going to involve this property. It's not going to effect this property.

Adding Additional Asset Protection To The Mix

One thing you might do to further increase your protections is to have a corporation which acts as your property management company. This property management company is completely separate from the LLCs, which hold your assets. Because it's completely separate, if you have a contractor sue you or a tenant sue you, if you have anybody else that deals with the business of running your real estate company that would sue you, this is the person or the entity that they're going to be able to sue. They won't have a claim against your property.

That's what we want. It protects your credit score from them suing you individually if you ran the business yourself and it protects your assets from anybody else getting to them.

To find the best way to protect your assets, start with our investor quiz and we'll help you build the right plan for your needs.