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

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:

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:

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:

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:

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:

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:

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:

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:

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 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:

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 ...

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:

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:

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.

asset protection structures: house frame

#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:

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. 

 

3 Key Tax Benefits of Using an LLC Structure

Limited Liability Companies have many useful properties for investors. Most of my clients approach me about forming Traditional LLCs or Series LLCs for asset protection, but often are completely unaware of the potential tax benefits their entity may provide. Today, let’s talk a bit about the tactics you can use to minimizing your tax liabilities. Specifically, we will be taking a closer look at the tax benefits of an LLC structure.

Tax Status Flexibility

One of the appealing tax benefits of LLCs is that you get to choose the manner in which it is taxed. But owners of Series LLCs don’t have to miss out on the fun. In fact, if you own a Series LLC, you can tax each Series differently if you desire. What exactly does that mean? Let’s take a closer look at how LLCs are taxed.

You may make your pick from any of the following three tax status elections when forming an LLC (or Series within a Series LLC):

Note that there is an exception to the flexibility norm. Single-member LLCs are more limited and may be forced to file as a sole proprietorship, then report income or losses on their personal returns. It is also important to be aware that the above are simply tax classifications rather than different types of entities. It can be easy to get the impression that an S-Corporation is an entity when indeed it is a tax status, as a C-Corporation is an entity.

Which tax option will be best for you? As with most answers in the financial realm, you’ll find that it depends on your individual circumstances, status, and ambitions in the real estate business. Only a qualified attorney and CPA should be trusted to give tax advice.

Deductions and Credits Galore For Those Willing to Look

If you’re serious about lowering your tax bill you know the power of deductions. So we recommend that you deduct, deduct, deduct everything that you can. No business expense is too small or inexpensive. See if you qualify for fuel deductions, and take a good written record of everything you really need for work and its cost. It may seem silly if you’re looking at many small receipts or expenses, but the old adage about how they tend to add up is true.

The fact that you may not be aware of deduction and credit opportunities is yet another good reason to have a solid CPA and attorney on your real estate dream team. These pros will often point out savings options you didn’t even know you were missing out on. So go forth and deduct shamelessly. It’s a win-win for both client and CPA.

Personal Assets May Be Leased to the LLC

If a valuable assets drag you into a higher tax bracket, an LLC offers a handysolution. You may be able to minimize this situation by leasing the asset to yourself (specifically, your LLC)  with a formal leasing agreement. Such arrangements lower taxable income and often allow for deductions.

For example, a home office is an item you lean on come Tax Season when you’re deduction hunting. Learn more details about the home office deduction and who can qualify from our previous educational resource on the subject. Home offices may not only be deducted from your taxes, but also leased back to your LLC.  When that leasing agreement goes through, you can write it off and claim it as a business expense. The fact that this type of business expense

Optimize Your LLC Tax Strategy With The Pros at Royal Legal Solutions

Between the asset protection and tax benefits, LLCs may begin to seem like a no-brainer. But to get the right entity that will do the best possible job for you, you may need Our crack team of attorneys and the CPAs we work with can assist you through any tax concerns you may have. As investors ourselves, we may have some more tips that you haven’t yet learned to exploit. Which ones will apply to you will depend on your personal circumstances.

If you are wondering how Royal Legal Solutions can help you save on your taxes,take our Tax Discovery Quiz. Our consultants are happy to explain your options to you, answer your questions, and when you’re ready, set up your personalized consultation. We look forward to helping you keep more of your income where it belongs: in your bank account.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

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:

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:

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.

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.

The Basics of Creating a Series LLC

When it comes to creating your own business or even forming one that already exists and putting it under your name, there are a few things you need to know.

You may want to form your business under an LLC or a Series LLC. An LLC stands for Limited Liability Corporation and it is slightly different from a Series LLC. The only difference between the two LLCs is that a Series LLC is protection for multiple LLCs. (Note: A Series LLC is sometimes called an SLLC.)

When forming a series LLC, the first thing you need to do in most states is to register with the Secretary of the State you are in. This filing will cost you a fee. However, there is much more to it than that. Read on!

Things You Need to Get Your Series LLC Started

Although not all states accept Series LLCs, those that do accept them require a few things before you get started:

One other thing you must do when forming a Series LLC is to make it clear that you are creating a Series LLC. However, it does differ from each state when registering and whether or not you have to notify them that you are filing for a Series LLC. In certain states like Utah, Texas, Delaware, Tennessee, and Oklahoma, it is a requirement that you notify officials that you are creating a Series LLC with seperate rights on each one. However, how much detail you do have to provide for it will depend on the state you are filing for one in.

Once all of your documents are filed on your LLC, you are officially in business.

Series LLC Record Keeping Rules

Everything should be kept on record when doing business. It is always a smart idea to have everything in writing to ensure it is all done right.

The same goes for a series LLC and a regular LLC business. Whether you have a one owner business or multiple owners in your business, you need to keep records. Here are a few different record-keeping rules to remember.

Keep Everything Separate

This means you need to keep records of each LLC within the series. A series LLC is several, individual LLCs. Each one needs to be separated and each one needs to have their own records kept. This is because each LLC in a series is distinct from the other one. The reason for a series LLC structure is to be able to manage different businesses. It keeps the management process straightforward and simple.

One thing you need to always remember about a series LLC business is to keep everything separated when record keeping. You don't want to combine them all into one. The reason is because it can leave you unprotected in the business.

Name a Registered Agent

Naming a registered agent for your series LLC is a requirement in most states. A registered agent is a physical address within the state you are located in. If this is a requirement in your state, failing to do so could leave your series LLC business without protection.

Make Sure to be Licensed to Run a Series LLC Business

Many states require business owners to have a license to run properties if they are owned by other people too or if you are managing a property management company. Not only can not being licensed to run a series LLC business put your business at risk, but you can run the risk of a lawsuit too.

Have Separate Bank Accounts

This should be something that everyone already knows since a series LLC is several, individual LLC businesses. Since you are already keeping the records separate for each cell in a series LLC, you should probably also have a separate bank account for each individual LLC in the series. By doing this, you will ensure you are being as careful as possible with everything in each LLC that is under a series.

Make sure you understand each of these series LLC record keeping rules for your series LLC. Also, make sure to abide by all of them and other rules there may be beside these main ones above.

How to Close Down Your Business Yourself

For many small business owners, closing down a business can be a daunting task. This is especially true if your business has incurred a large amount of debt. For most businesses, having some portion of your debts forgiven or filing for bankruptcy are the first thoughts. Bankruptcy is a serious, expensive and time-consuming court option that can significantly affect your credit. For those who opt to liquidate their assets and negotiate their own debt settlements, however, the process can appear overwhelming. Referred to as an out-of-court work out, or work out for short, this option is often cheaper and faster.

Work Out Process Overview

The work out process is actually much easier than you realize. At least the idea of it is. You, or a hired professional working on your behalf, contacts each creditor with a request for them to release you from debt. Often, a percentage of the balance owed is offered to the creditor to help facilitate negotiations. From a creditor’s perspective, filing a lawsuit against you will take time and money. When a fraction of the balance is offered, creditors may be willing to agree or at least enter into negotiations to avoid a court process. This is the most recommended approach for business owners who may be personally liable for business debts, such as sole-proprietors, partner or those who have personally guaranteed a business loan.
 
For corporations and limited liability companies (LLCs), it is likely that you are not personally liable for any business debt. If this is the case, you can close your business, liquidate its assets, and continue to pay creditors until your business funds are exhausted. While you will not need to personally owe on debts associated with these businesses, you will likely be hounded for years by creditors and their representative collection agencies. In the event of a lawsuit, you will need to file a response, which will cost you legal fees.

Advantages

Filing for bankruptcy should be a last resort. Not only will it cost you in court and lawyer fees, but also it will stretch out the timeline as it drags through a lengthy court process. Instead, liquidating assets and negotiating your business debt yourself provides you with more control over your debt. This is particularly important if you are personally liable for any part of your business debt, like:

Disadvantages

Liquidating assets and negotiating settlements can be much more work than you realize. Depending on the amount of money owed and the number of creditors banging on your door, doing it yourself can lead to more trouble than it is worth. Additionally, in some cases, once you enter into negotiations, you will be unable to file for bankruptcy later.

Your Professional Advocate

Hiring a professional, like those at Royal Legal Solutions, can save you time and money. Not only do we understand the negotiation process, we have the experience to get you the best settlement amount possible. Contact us today if you would like to know more about closing a business or debt negotiations.
 

Going Out of Business: Liquidate Assets Yourself or File Bankruptcy?

If you are going out of business, owe a significant amount of money to one or many parties, trying to figure out how you will pay your bills and get out of debt can be incredibly stressful. At Royal Legal Solutions, we often field many frustrated questions about how to pay off debt when closing a business. Below are the most common paths owners take to address these financial obligations.

The Options

For most businesses, financial obligations are fulfilled when the decision has been made to close in one of three ways.

All about Size

Often, the path you take to get out of business-related debt is dictated by the type and size of your company. For sole-proprietors, you may be able to utilize the work out method and settle debts yourself after liquidating all assets. However, if you cannot offer creditors enough or a settlement is improbable, bankruptcy is likely the best solution. Sole-proprietors are personally liable for any business debt, which means their homes, vehicles, and personal finances can be garnished in a lawsuit from a creditor. By filing either a Chapter 7 or Chapter 13 bankruptcy claim, sole-proprietors can prevent this. Partnerships are also personally liable for business debts. For these, a personal Chapter 7 bankruptcy claim or hiring a professional is the most advisable option. For most corporations or limited liability companies (LLCs), owners typically are not personally liable for business debt. If your business cannot afford to pay or settle with creditors, a business Chapter 7 bankruptcy or professional may be the right choice. However, if you personally assured a business debt and cannot pay it, you may need to file for a personal Chapter 7 bankruptcy claim as well.

Royal Legal Solutions

The professionals at Royal Legal Solutions are here for you. If you would like to set up a consultation, whether it is to just go over options for a work out solution or you want to discuss bankruptcy claims, we are standing by.
 

How To Properly Liquidate a Closing Business's Assets

There is more to liquidating your business assets than just posting a yard sale sign. Below, Royal Legal Solutions help you better understand the scope of liquidation and how to best order the chaos a closing business may be going through.

Identify Your Business Assets

Before you start selling off your business assets, you should thoroughly inventory all property physically owned by your company. Your inventory list should include both tangible and intangible items.

Tangible Items:

 

Intangible Items:

When inventorying these items, make sure you include a category designator, description and condition of the item, and who legally owns it. (Ownership may seem obvious, but it is important. If you bought a chair with your personal funds, you own it. If the business account paid for that chair, the company owns it. If your partner used their funds to pay for it, the chair belongs to them.)

Identify Buyers

You should keep detailed records of the ways you tried to sell each piece of your tangible and intangible assets. These records, which should include copies of your ads or website links, are an important means of protecting yourself from creditor inquiries. You need them for tax return purposes as well.
 
You should first liquidate any assets that are fully paid for and not promised to someone else, such as a vehicle that was used as collateral on a business loan. Industry contacts, like suppliers or competitors, are always potential buyers. Websites, like eBay, craigslist or industry-specific auction sites, are great ways to attempt to sell off equipment and furniture. (At most, you should not expect to receive more than 80% of the value of your assets.) Donating used items to charity for a tax deduction can also be helpful.
 
If you have pledged an asset to someone as collateral, you cannot legally sell or donate it without the express permission of that creditor. This fraudulent activity makes you personally and legally responsible in a court of law. For property you lease, you need to talk to the lessor before selling it off as well.

Identify Helpful Entities

When it comes to liquidating your assets, you may find it helpful to hire a professional. Royal Legal Solutions, for example, has the experience to help you navigate the liquidation process, as well as any debt negotiations or bankruptcy claims you may need to file.