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

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

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

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

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

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

Can a Corporation Manage an LLC?

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

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

Ways You Can Manage Your Real Estate LLC

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

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

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

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

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

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

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

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

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

Corporations require many more legal steps than LLCs, including:

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

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

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

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

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

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

Real estate investors opt for this choice because:

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

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

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

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

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

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

Manager-Managed LLCs vs. Member-Managed LLCs: What's Best for Real Estate Investors?

When you establish an LLC, you must plan for its management. LLCs may divide decision-making powers among members or select a manager. If your LLC is single-member, you assume managerial powers, but multi-member LLCs must decide. To make the best choice, check out our breakdown of member-managed LLCs, manager-managed LLCs, their differences, and how to address concerns around manager-managed LLCs.

Member-Managed LLCs vs. Manager-Managed LLCs: The Key Differences

Every LLC must decide between a member-managed or manager-managed structure. A member-managed LLC is the norm. These function like democracies, as power is equitably divided among the members. A manager-managed LLC, however, designates one person for managerial powers. Manager-management can help particularly large companies make decisions.

Whether the manager’s a “professional” or picked from the LLC’s members, the critical thing to know is that they have power over the entire LLC. Consider these company-wide powers delegated to managers:

Ability to enter the LLC into contracts
Hiring and firing powers over LLC employees
Authority to conduct daily business, including handling debts, writing checks for employees, and more
Borrowing or investing company funds
Buying and selling company assets

If you’re appointing a manager, read your LLC’s paperwork carefully before signing to ensure power is limited and manager responsibilities are clear. Even LLCs using managers don’t surrender these member powers:

Replacing the manager
Amending the operating agreement
Selling or dissolving the business
Other “major business decisions” defined by state law

Managers of LLCs must meet more compliance criteria than members. Managers have to play by both the rules of the company and the law.

Making the Choice: Does Your LLC Need a Manager?

The manager holds a specific legal role. You may select a “professional” manager, as some multi-member LLCs do, or select a manager from among your members. But here are the key issues to be aware of should you choose this route:

Authority issues. Managers in these types of LLC hold a great deal of authority, often disproportionate to members.
Daily Operations. A perk of using a manager is having a designated person to handle day-to-day operations: collecting payments, hiring contractors/employees, paying debts and taxes, etc. If you can perform these duties, you may consider volunteering to manage if your LLC collectively prefers a manager structure.
Asset concerns. The ability of managers to buy and sell major assets may prove problematic for real estate investing.

The good news is this: for every concern you have, there are ways to address it.

Using a Manager-Managed LLC: Tips for Mitigating Risks

A beautiful thing about the LLC is you have choices. Once you’ve made decisions, they’ll be in plain black-and-white ink for anyone to read in the form of your Operating Agreement. This is your LLC’s Bible.

For instance, some of the concerns about abuse of power are easily prevented by addressing these possibilities and creating checks (like requiring a member vote) in your Operating Agreement. You may choose to make amending the Operating Agreement more difficult or bar managers from making certain calls without member consent. In fact, any matter you’d like member consent on can be accounted for before LLC formation.

The best way to control for problems is in your Operating Agreement prior to forming your LLC. Of course, LLC members truly worried about hierarchy can side-step the entire issue easily by simply forming a member-managed LLC.

Need Help With Your Operating Agreement? Common Problems + Remedies

Your operating agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in operating agreements and their remedies below.

Common Oversights in Operating Agreements

The vast majority of the time, the problems in LLC operating agreements come down to language that is vague, irrelevant to your particular business situation, or ambiguous in any way can create real-world problems for your LLC.

Here are some common issues, along with examples of phrases to watch out for in your operating agreement.

Decision-Making Powers

LLC members must have a procedure for decision making. When an LLC has multiple members, some decisions may be made by majority. While you can specify unanimous consent under certain circumstances, clearly defining what constitutes a “majority” clarifies your agreement. Decide with your fellow members whether you want to define majority as a percentage of ownership or by number of members.

Another common problematic clause is one which states that any member may do business with the LLC absent any restriction. This can create issues if a member abuses this freedom. To avoid potential problems, specify that any member of the LLC must get majority approval before performing any transaction directly with the LLC.

Managerial Powers

These issues are particularly important for multi-member LLCs. When an LLC is formed, the operating agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?

Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good operating agreement keeps managerial powers in check in the following ways:

Eliminating vague language around Manger selection. Instead, spell out how manages are elected or removed. If voting is the method you choose, specify who is allowed to vote on this issue.
Rephrasing wording that could allow for abuse of power. Any action where the manager is acting unilaterally should be questioned. Provisions giving a Manager exclusive control over the company are inherently problematic, and best left out of operating agreements. Unless you want your Manager to have the power to sell off company assets without your approval, it’s time to get clear. Specificity, again, can solve potential abuses of power. Clarify how and when company assets may be sold, including when such decisions should be put to a vote.
Limiting unnecessary managerial powers. Some operating agreements allow powers that simply should not be included. A common example is a provision stating that the manager may hire any person to work for the LLC. Requiring majority approval for any new hiring offers more protection.

Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned real estate attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding operating agreement, but are more likely to overlook these nuances.

Avoid Operating Agreement Problems: Get Help From a Qualified Attorney

operating agreements are simply an example, albeit an important one, of the many documents that should be reviewed by a trained legal professional. Many prospective clients ask us if their local attorney will be sufficient for this. Most of the time, the wisest thing to do is hire legal counsel with specific experience creating LLCs for real estate asset protection purposes.

While any attorney is certainly better than no attorney, we recommend a skilled asset protection attorney who knows how to help investors like you. Because we have our own experience crafting deals and planning for worst-case scenarios, we draw on our experience as both investors and attorneys when counseling clients.

3 Key Tax Benefits of Using an LLC Structure

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

Tax Status Flexibility

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

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

Disregarded Entity. A pass-through entity, also commonly referred to as a flow-through entity allows taxes to be passed onto your personal tax return. Learn much more about the benefits of pass-through tax treatment for real estate investors from our previous article on the subject. Single-member LLCs and married couple LLCs are typically treated this way automatically in most jurisdictions.
Partnership. Partnership taxation is the default status of multi-member LLCs, but they may choose to change to S-Corporation or Disregarded Entity status. In entities taxed as partnerships, each member receives a Schedule K-1 and reports their share of the profits and losses. This information, along with a completed Form 1065 for partnership taxation, will be attached to members’ tax returns. In this way, the company isn’t billed, but the members each pay their fair share of the taxes.
S-Corporation. This status makes sense for anyone who would benefit from the lower tax rate on the entity’s first $75,000 in income. It’s treated more like a corporation, albeit with different provisions than the more complex C-Corporation. It also comes with a super sexy form called Form 8332. Filling it out might not be a blast, but the savings sure can be for certain investors.

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

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

Deductions and Credits Galore For Those Willing to Look

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

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

Personal Assets May Be Leased to the LLC

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

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

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

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

If you are wondering how Royal Legal Solutions can help you save on your taxes,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

5 Reasons Why You Need a Qualified Registered Agent

If you own property using an out-of-state entity, you probably already know the importance of having a registered agent. If this term is news to you, get hip: most states make having a registered agent for your LLC a legal requirement for non-residents. While there are many good reasons to hire an effective and qualified registered agent, we have boiled down the top three you need to know below.

Reason #1: Easily Operate In Multiple States

If your business is considering operating in multiple states, the business must be registered in each of these states. Having a registered agent on your team streamlines this process when you pick a service or attorney that has a presence in each necessary state. You don’t have to worry about the headache of registering or finding agents for each state.

Reason #2: Quickly Manage Mountains of Paperwork for a Low Annual Fee

For the actual amount of work your registered agent will do, the fee you will pay is negligible--particularly if you compare it to the number of hours it would take you to manage your business’s legal correspondence yourself. The density of paperwork involved in serving as a registered agent is another good reason to go with a professional or attorney in this role, as well. A lawyer is more likely to know their duties and the legal requirements attached to them intimately, and is less likely to make foolish mistakes or oversights that a layperson might.

Reason #3: Maintain Your Anonymity

If you served as your own registered agent, your home address would likely end up on business correspondence, undermining your anonymity. Using a registered agent keeps your own name off of public records and away from prying eyes.

Reason #4: Never Worry About Business Hours

Some legal correspondence must be sent or received during “normal business hours.” Of course, not every investor or real estate business operates on “normal hours,” particularly if the real estate business exists for passive investment income. Fortunately, outsourcing your registered agent needs means this is yet another detail you won’t have to worry about. Most are aware of and easily able to meet time-sensitive obligations.

Reason #5: Save Your Own Time

If you were so moved, you could do all of the research to serve as your own registered agent. But would you be confident in your abilities, and is this the best use of your time? For most investors, the answer is simply no. Fortunately, registered agent services and legal professionals can help. At Royal Legal Solutions, we offer not only Registered Agent services, but subscription-based business compliance services so you can let us worry about the paperwork while you run your business. If you think you could benefit, contact us today to ask any questions you have or set up your consultation.

A Bad LLC Operating Agreement Can Ruin Your Real Estate Investments

Your operating agreement/operations agreement is one of the first documents your attorney will draft when forming your LLC. Learn more about the common problems in LLC operating agreements and their remedies below.

Common Oversights in LLC Operating Agreements

The vast majority of the time, the problems in operating agreements come down to wording. Language that is vague, irrelevant to your situation, or ambiguous in any way can create real-world problems for your LLC. Here are some common issues, along with examples of phrases to watch out for in your operating agreement.

Decision-Making Powers

Managerial Powers

These issues are particularly important for multi-member LLCs. When an LLC is formed, the operating agreement must spell out who the Manager is, how a Manager is selected, and what degree of control they have over the LLC. Unfortunately, clauses that give too much power to a Manager may be abused at the expense of other members or the company. A good document keeps managerial powers in check in the following ways:

Eliminating vague language around Manger selection. Instead, spell out how manages are elected or removed. If voting is the method you choose, specify who is allowed to vote on this issue.
Rephrasing wording that could allow for abuse of power. Any action where the manager is acting unilaterally should be questioned. Provisions giving a Manager exclusive control over the company are inherently problematic, and best left out of operating agreement. Unless you want your Manager to have the power to sell off company assets without your approval, it’s time to get clear. Specificity, again, can solve potential abuses of power. Clarify how and when company assets may be sold, including when such decisions should be put to a vote.
Limiting unnecessary managerial powers. Some agreements allow powers that simply should not be included. A common example is a provision stating that the manager may hire any person to work for the LLC. Requiring majority approval for new hires offers more protection. Securing majority approval for all new hires may prove burdensome for multi-member LLCs, so you may choose to apply this condition to C-suite employees and others with major decision-making powers. This approach is a practical way to ensure member power is balanced appropriately.

Bottom line: any clause that has the potential for abuse of power will catch the attention of a seasoned attorney. Lawyers who do not regularly form LLCs may be aware of the necessary parts of a legally-binding agreement, but are more likely to overlook these nuances. An experienced business attorney or real estate attorney who regularly forms LLCs is your best bet for getting what you want out of your operating agreement.

To learn more, see What Is The Difference Between An Authorized Member And A Manager In An LLC?

How to Make a Lien Friendly & Protect Your Real Estate

Yes, there is such a thing as a “Friendly Lien." This is a lien against your property held by a party who is friendly to you. Ideally the “friendly party” is an LLC or corporation created in a jurisdiction (like Wyoming or Nevada) that allows you to use a nominee to make your involvement with the business anonymous.

The friendly lien will prevent potential litigants and creditors from pursuing the property since it’s "encumbered." No sane lawyer will dive into a lawsuit before crunching the numbers. After all, why waste time trying to get a favorable judgment if you can’t get paid? This is why a friendly lien is a great addition to your asset protection toolbox. The lien will help make your property less attractive to predators.

But here’s the rub. It’s not foolproof and it can also end up being a quick lesson in how to lose money in real estate.

Friendly Liens Can Go Bad

You need to file a friendly lien the right way to avoid running afoul of the law. Offering a counterfeit lien or false instrument for recording can land you in the slammer in many states. Civil courts refer to it as “slander of title” and issue hefty fines for such actions.

So, what exactly is a bad lien? This is a lien that lacks economic substance. For instance, you shouldn’t claim that your LLC loaned you some money when it, in fact, did not. The IRS and the court system won’t be forgiving. And you’d better hope you look good in black and white stripes if you go this route. Criminal penalties can include jail sentences of two to three years.

Using Friendly Liens the Right Way

You need to get a few things right to keep your property safe when using friendly liens. Unless, of course, your intention is to use the lien to obfuscate or defraud, in which case nothing will protect you from the law.

The lien must reflect the substance of the transaction. If an LLC you’ve created files a friendly lien against your property, make sure the lien is structured as an Equity Line of Credit (ELOC) and not a loan. ELOC transactions usually involve lending party agreeing to lend an amount of money upon demand by the borrower.
Your LLC must have the funds for the loan available.
Liens must be recorded. Drafting a promissory note for the LLC is also vital. The LLC must be set up in commercially reasonable terms (see our resources on how to start an LLC).

It’s Only an Asset Protection Smokescreen

The friendly lien only acts as a smokescreen. It will definitely not protect you from creditors coming to collect. If you have not actually borrowed any money from the LLC, then a friendly lien becomes a meaningless document. This is why we recommend a multi-pronged approach to asset protection for rental property owners.

Real Estate Flipping: LLC Taxation Issues To Know About

Are you an investor engaged in real estate flipping? Do you deal in tax liens or deeds or engage in investment activities in which you never hold on to property for longer than a year?

You’re probably wondering what sort of entity I recommend for such transactions. If you guessed an LLC, you’re right. But it's not as simple as it sounds.

One of the issues flippers will struggle with is how these LLCs are taxed.

Why?

This is an issue that can make or break your business. So you need to consider your needs as a whole to come up with the right entity for you.

Let's get down to the meat and bones of setting up the right entity for flipping properties.

Strategy 1: The Legal Beagle’s Take

Your attorney will, more often than not, focus on liability and how to avoid it. Most attorneys aren't savvy real estate investors themselves (although we at Royal Legal Solutions are). But an "average" lawyer will likely advise you to set up the LLC as a partnership for federal tax purposes.

But there’s a problem with this approach: You’re left exposed to the IRS. If they decide your real estate investment is actually an “active business,” you’re toast. You’ll be subject to self-employment tax. Even worse, this judgment about whether your investment is actually business is at the discretion of the Tax Court.

Strategy 2: In Comes The CPA

At this point, you’re probably thinking a CPA will solve all the problems you’re likely to face with the Taxman. After all, they’re the number cruncher.

Your CPA may suggest that you can dodge the issue with Uncle Sam by setting up the LLC as an S-Corporation. The IRS treats S-corporations the same as partnerships. They’re both pass-through entities where income passes through to the 1040 of the owner. This way, his or her income is not subject to self-employment tax.

I’m sure you’ll agree this is a much better prospect. But we still have a problem.

On the surface, everything looks hunky-dory. But upon closer inspection, you will realize that the advice from the CPA only protects you if taxes were your only problem. Unfortunately, this is not the case with most real estate investors. You will need to raise money at some point.

And here’s where both the lawyer’s and CPA’s approach will fail. When applying for a loan via a disregarded LLC or an S-Corporation, the bank will treat you as a high-risk borrower if you’re self-employed.

Strategy 3: The C-Corporation

Talk to someone with entity and tax chops (like us!), and they’ll know about this third alternative. It involves setting up a C-Corporation to handle your active real estate business while receiving your profits as W-2 income. This way, you won’t be considered self-employed or a business owner since your ownership is not part of your individual 1040.

So ... What’s the Best Strategy For Real Estate Flipping?

There’s really no one-size-fits-all approach for flippers. Every investor has to pick what works best for their unique situation. Your choice will be based on whether you’re more concerned with funding your retirement, borrowing, or minimizing your taxes.

Interested in getting more details? Check out our article Selecting the Best Entity for Real Estate Flipping.

Joint Venture Liabilities Likely to Get You Sued

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

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

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

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

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

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

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

Liability Risks Associated with Joint Ventures

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

Good Faith and Fair Dealing

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

Loyalty to Joint Venture Partners

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

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

Duty of Care

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

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

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

Three Reasons to Title Your Investment Property in a Land Trust and Not An LLC

In previous articles, we’ve discussed the main benefits of holding title to real estate investment property in a land trust. A land trust is just like a standard trust, except as the name implies, this type of trust holds title to real estate or real estate related assets.

Real estate notes, deeds and other agreements can be held in a land trust. A land trust can be recorded as either a revocable or irrevocable land trust. The majority of land trust are structured as revocable trusts. However, we’ve also had several inquiries lately about holding title to real estate investment property in an LLC.

While this is an option, based on our own experiences as real estate investors, we know of a few reasons why a land trust is a better title holding vehicle. In this article, we’ll discuss three reasons why you should title your property in a land trust rather than an LLC.

Land Trusts Offer Privacy

One of the main benefits of a land trust is that it offers privacy that you can’t find in an LLC. When you set up a land trust, you’re given the choice to create a name for each trust. This name can be anything, as long as it doesn’t infringe on copyrighted material. In the past, we’ve advised clients to name their trust wisely and in such a way that no personal connections can be drawn from the land trust title and those parties involved in the trust. This creates a layer of protection, since even if someone wants to attack one of your assets, they would have trouble connecting those assets to you. For record keeping purposes, a land trust is documented under its official land trust name. Uncovering ownership details behind a mysterious sounding trust like 321 CWL Land Trust may be more trouble than it’s worth. This is why a vague land trust name can be the secret to preventing lawsuits before they even start.

Land Trusts Can Help You Avoid Losing Everything With A Single Lawsuit

When you put the title to each property you own in its own individual land trust, it separates the liability associated with each. In contrast, if you hold all your property in a single LLC, it not only doesn’t provide anonymity but it also creates a scenario where an attack on one property can lead to an attack on the other properties. This is because all the property is held under the same shared entity. With a land trust, your potential losses are capped at each individual asset. Thus, potential lawsuits are managed, rather than in an LLC where all your hard earned assets are up for grabs.

Land Trust Titles Provide Efficiency

Lastly, a land trust provides efficiency when it comes to financing and selling your property. When each property is held in its own separate land trust, the financing or sale of one property doesn’t impact the other properties, as it may in an LLC holding multiple properties. Our legal team is highly experienced in how to protect and streamline the management of multiple properties. We can help you create a comprehensive asset protection strategy today.

Does the Manager of a 401(k) LLC Need a Real Estate License?

LLCs are magnificent legal creatures with a number of fantastic uses. One potential use is that they can act as an investment vehicle for your 401(k). They can also hold other LLCs. It is by no means out of the ordinary to establish a separate LLC for each property held in the 401(k).

However, some folks wonder if they’re going to buy property with their 401(k) LLC, do they need to have a real estate license. The short answer is: no.

Why You Don’t Need a Real Estate License to Buy Real Property for your 401(k)

Not only do you not need a real estate license to purchase real estate with your 401(k), but if you use your real estate license to purchase property, it could be flagged as a prohibited transaction by the IRS.

Retirement accounts such as 401(k)s and IRAs are prohibited in investing in businesses that you are receiving a profit from or properties that you yourself (or your family members) derive a benefit from.

Being both the manager of the 401(k) LLC and simultaneously executing transactions with your real estate license on behalf of the 401(k) would be red-flagged by the IRS as a prohibited transaction.

What If You Execute Transactions with Your Real Estate License for Another LLC of Which You are an Employee?

Even then, the answer is no. Neither an owner of real estate nor a principle of an LLC needs to have a real estate license to execute trades related to real property. That includes selling, leasing, or renting.

Even those who have an LLC business that is not related to their 401(k) LLC would not necessarily need a real estate license for the purpose of executing trades.

Why not?

Well, the answer is sort of simple. An employee who is executing trades, managing properties, showing houses, or otherwise engaged in real estate transactions would need a real estate license. You as the owner or principle, however, do not.

Basically, because you own the property or the company that owns the property, no one really cares if you have a real estate license or not. In fact, if you’re using your real estate license to execute trades from your 401(k) it would probably work your disadvantage since it would be a conflict of interest according to IRS rules.

If you’re still fuzzy about the issue, it’s always best to contact a tax professional.

Land Trusts and Limited Liability Companies

If you want to protect your privacy and real estate assets, a land trust is a great way to do so. Why? A land trust inherently provides anonymity on public records related to the ownership of a property. For those investors looking for increased protections, however, a limited liability company (LLC) can help.

Understanding the Benefits of an LLC

As the name implies, a LLC limits your personal liability. Legally, your LLC is responsible for its own debt and obligations. As such, your personal finances and assets are not subjected to any court judgments or legal proceedings against your LLC. If you fail to pay mortgage on a home purchased through your LLC, only the LLC itself is responsible for repaying this debt. LLCs are also exempt from having to hold annual meetings or filing extensive records or reports. The Internal Revenue Service (IRS) classifies LLCs as proprietorships or partnerships. As such, an LLC is able to take advantage of tax breaks associated with them. For example, an LLC does not pay taxes on any gains. Instead, it is used as a pass through vehicle and taxes are paid through the owner’s personal tax returns instead.

How Land Trusts And Limited Liability Benefit You

A land trust provides property owners with complete anonymity. This is a crucial feature that can obscure your net worth and limit potential lawsuits. This is because, with a land trust, the property’s owner is listed as the name of the trust itself. Your personal information is not associated with any public records related to ownership of your property. As the beneficiary, you also retain full control of your property. You can manage it as you wish, rent it to others, or even sell it whenever you want. This is a great way to protect your asset and you from potential money sharks looking to make a quick buck off someone they believe has a high net worth.

The Best of Both Worlds

When you combine land trusts with LLCs, you get the best of both worlds. How? Let us take a look at some of the most frequently asked questions regarding land trusts and LLCs.

Why would I use a land trust when my LLC can just purchase the property itself? With an LLC, the owner is listed within the records of the Secretary of State. This means, if your LLC is listed as the owner of the property, anyone can find out who you are. Not only will they easily obtain your name, but if your LLC is listed under your home address, they also have that vital piece of information as well. When you establish a land trust through which your LLC purchases property, however, the name of the trust is listed as the owner on all public records. This maintains your anonymity.
If that were true, why wouldn’t I just use my land trust to buy property? As the beneficiary, you are liable for any debts, obligations or lawsuits that are related to the property within the lawsuit. If your renter, for example, slips, falls and breaks a hip on your land trust owned rental property, you could be personally liable for the damages, medical bills, and other legal judgments that result. However, by default, a LLC exempts you from that personal liability. If that same situation occurs through a land trust owned by your LLC, your personal finances are not able to be taken into consideration. Only the value of the land trust itself is subject to legal proceedings.

A Note on Series LLCs and Land Trusts

When you establish a LLC, you should consider forming a series LLC. Why? A series LLC segregates assets. Each asset under the various “series” are protected from lawsuits or judgements that may be made against one and other. In other words, if you establish a series LLC, each with its own land trust, the properties under Series LLC A, B and C are exempt from judgments against Series LLC D. This protective barrier between LLCs and assets is a great way to further protect your investments, while maintaining your anonymity.

Royal Legal Solutions: A Knowledgeable Trustee

In a land trust, you designate a trustee. This is true even if you establish a land trust in support of an investment made through your LLC. At Royal Legal Solutions, our professionals have experience with both land trusts and LLCs. Our experts are fully aware of the best ways to protect your assets and can advise you based on experience, a thorough understanding of state and federal laws, as well as our professional insights into the benefits of the land trust. In fact, Royal Legal Solutions is able to assist you with establishing your land trust and your LLC. We also have experience with assisting clients all over the United States, as well in Canada. If you are interested in scheduling a consultation with Royal Legal Solutions, please 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.

Why Lawsuits Against a Series LLC Go Nowhere

If you’ve got money, people want it. Lawsuits are one of the easiest, yet still legal, ways for people to take your money. The more money you have the more likely it is someone will try to take it from you in a lawsuit. The same applies to your LLC if you have one.

The more money you have located inside of any individual LLC, the more attractive it's going to be for someone to sue you. Lawsuits against a series LLC, on the other hand, are a dead-end for money-hungry lawyers and litigants.

Lawsuits are all about how much money can I get out of somebody, and if there's a million dollars sitting inside of an LLC in equity or cash, well, that might be something that I really wanna go after.

That's why you should limit the equity of any individual LLC to $200,000.

Note: This is not the case if you're using a series LLC for real estate, because series LLCs allow you to compartmentalize those assets. So, you don't have the same worries there that we do inside of a traditional LLC.

However, I think that usually a few million dollars inside a series LLC makes it reasonable to be able to create a new entity just in case. Why not? Expenses that you're being able to incur by having to create a new series LLC,are far less than the amount of risk that you pose when you're risking millions of dollars in equity.

You can read about what the IRS thinks about an LLC here. But know this: The more money or equity you have inside your individual LLC, the more attractive it’s going to be for someone to sue you. And when they do, all of your assets will be caught under one legal net.

That’s why, compared to an LLC, a series LLC offers far more protection for you and your assets when it comes to lawsuits. Compartmentalizing assets means you can spread your assets out so in case someone does sue you, only one of your assets will be at risk.

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.

Funding Your Series LLC

When you are ready to start your own business and place it under a Series LLC, you do need to put money into it to make it a profitable one. When funding your Series LLC, you will be better off putting the money into a bank account for your business. There is more than one way to fund a Series LLC. Here is more information on how funding your Series LLC works.

Open a Bank Account

When funding your Series LLC, the first and most important thing to do is to open a bank account for it. Your very first deposit will be to pay for your equipment you need for your business. Such equipment includes office equipment and supplies, office furniture, and whatever else you will need for your business. There are two ways you can do this. Keep reading to learn how to fund your Series LLC with your bank account.

Invest in Your Company

The first funding option for your business is to invest in it. However, if it is a Series LLC, you will not be the only person investing in the company. Although there will be more than one owner if more than one person invests in it, make sure to bring them into the company at the same time. You don't want to bring in other investors and owners at different times. Also, don't forget that investing in a business has to go under both federal and state laws. Another thing to remember is to not bring in other business owners without proper legal advice first.

Loan Yourself Money for Your Series LLC

The other way to fund your Series LLC is to loan yourself money for your business. You should do this for startup and operating expenses. You can always put the money back in after you start making a profit. Or, you can make payments back into the business to pay it back. Because the Series LLC doesn't think of this as income, you will not have to report this to the IRS for tax purposes. However, if this is the option you choose to fund your Series LLC, you will have to keep records about it. The best way to record the loan and the payment back is to write out a Promissory Note as well as a resolution statement from the other members of the LLC saying that they approve of your loan.

Another thing about using the second option to fund it is that you will have to add interest to your own loan. The reason for this is because if you don't, the IRS can do it themselves. This could mean that it will end up being taxable income for the lender, but without an offsetting expense on it.

How to Distribute Assets to Remaining Owners When You Close Your Business

When you decide to close your business, it is not as easy as simply pinning a “Closed for Business” sign on the front door. From settling debts to distributing assets, there are many things you will need to do before moving on. Royal Business Solutions understands how turbulent this time can be for you. Selling business assets, in particular, can seem like a way to make back some of the losses you may have had. However, you should know more about distributing assets before you do so. Let’s take a look below.

Before Issuing Distributions

It is important that you take the time to address any of your business incurred liabilities before you distribute any remaining assets.

Liquidate physical assets. It is very important for you to sell off any physical assets your business as accrued. Referred to as “liquidating”, this act turns your property into much needed cash that can help you pay off all of the items listed below. If you are lucky, you may even get to pocket some of the proceeds should the value go beyond your total balance owed.
Pay your bills. Request all outstanding invoices from any creditors. You will need to pay off any bills owed to these creditors prior to divvying up the remainder of your business assets. In fact, state laws typically prevent corporations, limited liability companies (LLCs), and partnerships from distributing assets to owners if debts are still unresolved and owed.
Pay your employees. You must pay your employees for the time they have worked. Some states may even require you pay for any unused leave they have accrued during their time working for your business. If you had hired independent contractors instead of or in addition to hiring regular employees, you will need to pay them as well.
Pay for services, cancel leases, and settle contracts. If you rent an office, have outstanding contracts, or utilize any other services, like electric or cable, you will need to take care of them before distributing the remaining assets to owners. Any deficiencies or penalties incurred by your company’s closure will also need to be paid.
Pay your final taxes. You need to make sure you pay all of your taxes before you distribute assets to owners. This includes, but is not limited to, sales, payroll, income and unemployment taxes that you may owe.

Making Distributions

For many, addressing liabilities may deplete you of excess proceeds and, therefore, prevent you from having to worry about asset distributions. However, should you be able to pay for all of the items listed above and still have leftover money or assets, you are in luck. How you distribute your assets depends on the type of business you are closing.

Sole-Proprietors: If you are the sole-proprietor of your business, the only person you need to distribute remaining money or assets to is yourself. As long as your debts are taken care of, the remainder is yours to keep.
Partnerships and LLCs: Partners and members typically have their own capital account. These accounts were opened with the initial investment balance each made to the business. As the business profited, these accounts grew. As it lost or when distributions were made, the accounts decreased. In the event of a closure, it is likely that the investment thresholds in each of these accounts is not able to be met. In this case, the remaining assets would be divvied up in proportion to each investor’s percentage. (For example, if Partner A invested 80% of the startup cost and Partner B invested 20%, the partners would receive that same percentage of the remaining asset value.)
Corporations: All remaining assets should be totaled and divided up amongst all shareholders. As with the partnerships and LLCs, the amount given to each shareholder is directly proportionate to the investment or share amount each held.

Closing Your Accounts

As your does close, your remaining accounts should too. This includes your business bank account and any business credit cards you may have held. Royal Legal Solutions can help you with every step in the lifecycle of business ownership. Set up a consultation today if you would like to know more about asset distribution and how to close your business without violating any laws or regulations.

The Basics of Traditional LLC Articles of Organization

There are two main documents to establish when forming an LLC. First is the articles of organization. Next, is the operations agreement. While the operations agreement is a critical document that outlines the LLC’s processes, members aren't required to file this document with their state. Meanwhile, the articles of organization are a state requirement. Note that the articles of organization is sometimes called by other names such as “articles of formation.” Regardless of your state’s filing procedures, the following components are typically required by all states. Anyone forming an LLC should read on and familiarize themselves with each component.

Name

The main thing to keep in mind when naming your LLC is that it must be a name that isn’t already registered. A quick online search of your Secretary of State’s website can help determine whether a name is available.

Registered Agent

The registered agent is the individual assigned to receive formal communications on behalf of your LLC. These communications include important tax documents and lawsuits. The articles of organization will not only require the registered agent's name but also a physical address. In most cases, a member of the LLC will serve as the registered agent and the business address will serve as the physical address of the registered agent. However, in some cases a lawyer is named the registered agent. Thus, all formal communications including subpoenas are sent to his/her law offices. Keep in mind that the registered agent must be kept up to date. If the registered agent is an LLC partner and he/she leaves, the appropriate paperwork needs to be filed to name a new registered agent.

Statement of Purpose

Your articles of organization’s statement of purpose doesn’t have to be anything fancy. In fact, some LLCs stick with this simple sentence:

“The purpose of the Limited Liability Company is to engage in any lawful activity for which a Limited Liability Company may be organized in this state”

Management

Some states require that the articles of organization specify how the LLC will be managed. There are two common entries here:

Member Managed. This is the most common management choice. Here the owners (members) of the LLC also manage the LLC.
Manager Managed. Under this structure, one member or group within the LLC is charged with management duties. In some cases, an outside party is hired to manage an LLC. This is done in cases where it wouldn’t be practical for each member, especially in larger companies, to hold management responsibilities. Outside parties are given management duties when LLC members lack the necessary management experience.

Authorized Signature

At least one authorized signer is required to leave their autograph on the articles of organization. However, in cases of multiple members, it’s a good idea to have all members who are managing the LLC sign the document.

Draft the Right Articles of Organization For Your LLC

As you can see, the basics to a traditional LLC’s articles of organization aren’t too complicated, but do require some research in finding an available name. Some forethought about who should receive important business documents and how the LLC will be managed will also be required. We not only know each component of the articles of organization, but we can also streamline the process for multiple LLCs. Call us today at [GLOBAL VAR=phone-number] for a consultation.

How Traditional LLC Members Are Taxed

Today, we’ll be discussing how LLCs are taxed. One of the most important terms to understand in order to grasp how taxes work with an LLC is “pass through entity.” In these entities, both profits and losses “pass through” the LLC towards each LLC member. Members then report profits and losses on their own personal tax returns.

This is where things can get tricky since we’re dealing with multiple members.

The IRS Uses Distributive Shares to Tax LLCs

Multiple member LLCs are treated as partnerships. Each member pays taxes on his/her own share of the profits and losses. The specific share breakdown is based on the distributive share, which should be outlined in the LLC operating agreement.

Distributive shares are usually based on percentage ownership. Thus, a standard 50/50 split is common. However, there are other arrangements. Let’s look at a common example.

Case Study: Taxing Multi-Member LLCs With Uneven Shares

Kevin and Steve operate a small surfboard shop. According to their LLC operating agreement, the distributive share allocates 70 percent of profits/losses to Kevin and the remaining 30 percent to Steve. This uneven split accounts for the difference in both the time and money both parties can invest in the shop. Come tax time, Kevin and Steve will report their respective shares on their personal income tax return.

No separate business tax filings are required thanks to the LLC being considered a pass-through entity. Both Kevin and Steve can enjoy the liability protection of an LLC, without having to file taxes beyond their own personal tax return. In addition, both parties can report profits and losses according to a distributive share that accurately reflects their economic situation.

Special Allocations in Traditional LLCs

In special circumstances, members may choose what’s called a “special allocation.” This is when LLC members report profits and losses in a way that doesn’t reflect their ownership percentage in the company. With this flexibility, it could be tempting to shift profits and losses in a way that artificially reduces tax liability for certain members. This form of abuse is why the IRS has stringent rules when it comes to meeting LLC special allocation requirements. In fact, special allocations are often rejected.

We can help your LLC meet special allocation requirements and streamline the traditional LLC tax process. Take our Tax Quiz to schedule a consultation.

Keep more of your money with a Royal Tax Review

How to Manage Special Allocations in Your Traditional LLC

Special allocations are often the trickiest things to deal with when it comes to a traditional LLC. However, by not understanding the intricacies of special allocations, you are missing out on one of the most valuable benefits of an LLC. An LLC provides flexibility. Special allocations are a prime example of this flexibility. Here’s how managing special allocations in your traditional LLC can benefit business partnerships and what to watch out for to avoid problems with the IRS.

What is a Special Allocation in a Traditional LLC?

A special allocation is made when the profits and losses from a business are split up in a manner that is different from the ownership percentage declared in the LLC operating or partnership agreement. For instance, Bill and John start a new bike repair business. John is able to put in more time and effort into the business. In fact, John is able to invest in the business full-time, while Bill can only invest in the business part-time since he is finishing up a two-year degree. In addition, John is investing more capital in initial startup cost, while Bill has agreed to invest his share of the business in smaller portions throughout two years. With the right wording, Bill and John can file LLC documents in a way that allows John a higher percentage of the profits and losses for the first two years of the business. Bill would be allocated a smaller share since he’s only invested part-time for the next few years.

Valid Special Allocations

In the above case, Bill and John are properly managing the special allocations in their traditional LLC. They are using the special allocations provisions of an LLC in a way that splits profits and losses according to actual economic circumstances. In IRS terms, their LLC’s special allocations are fulfilling “substantial economic effect” requirements.

In checking these requirements, the IRS does a two part analysis. The details of this analysis are complicated and are by no means as cut and dry as the above mentioned example. What is critical to understand is that the IRS takes great measures to find and reject any attempts to use special allocations to artificially reduce aggregate tax liability.

Pass IRS Special Allocation Requirements

This is why getting legal counsel is so critical when it comes to drafting LLC documents. We’ve helped several clients form LLCs with special allocations. We specify special allocations in a way that passes the IRS’s stringent two part analysis. What several so called “experts” won’t tell you is that if the IRS rejects your special allocations they will default to splitting up profits and losses according to the LLC’s ownership percentage split, which is typically 50/50. Don’t go through the trouble of drafting special allocations into your LLC operating agreement only to get it rejected. Get it done right the first time. Call us today at [GLOBAL VAR=phone-number] for a consultation.

LLCs Can Function as Pass-Through Entities

The LLC, or Series LLC, has the easiest tax returns for a single member. It's known as a pass through-entity. This means that all of the income from your company's able to be recorded on your personal income tax return. You don't have to pay thousands of dollars to CPA take people to file that business tax return that you would have to do otherwise.

This is also true if it's you and your spouse filing jointly for your income taxes. Some states they require multiple members, so this can be a huge leg up when it comes time for ease of use of tax preparation.

Let's take for example that you both have you and a partner inside of the LLC. You're going to have to file what's known as a partnership return. A partnership return is a separate return for the business itself. You're going to need somebody to help you repair that return, to which I suggest you hire a good CPA who is also a real estate investor to be able to help you prepare the return.

Also note that an LLC is able to be taxed as a corporation Some instances it can make sense in terms for your operating company to have that LLC taxed as an s corporation. So keep that in mind.

My name is Scott Smith. I'm an asset protection attorney, a real estate investor, and I want to help you. Click here to schedule a consultation today!

LLC Self-Employment Tax: Rules for Single-Member LLCs

Single-member LLCs must pay a self-employment tax along with their standard tax on gross income. In fact, 92.35% of net earnings from self-employment, or practically all of the LLC owner’s income is taxed.

The reason single-member LLC owners are required to pay self-employment taxes is because earnings aren’t considered a salary. By default, earning are classified as self-employment earnings. Thus, the LLC owner is taxed like a sole proprietor. Today, we’ll discuss this self-employment tax in further detail, including ways to reduce its overall negative effect on your tax bill.

Where Does the Self-Employment Tax Go?

At this point, you may be wondering how this tax is divided and where does it go. Here is a quick breakdown:

12.4% of the tax goes towards Social Security.
2.9% of the tax goes towards Medicare.
0.9% is added towards Medicare if your income is over $250,000 (married and filing jointly). This income threshold is reduced to $200,000 if you’re filing as single.

Can I Avoid LLC Self-Employment Tax?

As a single-member LLC there is no way to avoid paying the self-employment tax. It comes with the territory. HOWEVER ... There are some things you can consider to lower the total amount you owe Uncle Sam. Here are two ideas to consider:

Remember you can deduct up to half of the self-employment taxes you pay as a business expense. Thus, if you paid $5,000 in self-employment taxes, up to $2,500 can be marked as a business expense. This can in turn, reduce your adjusted gross income.
Note how passive income is treated differently. Passive income isn’t subject to self-employment taxation. However, the term “passive” is very narrowly defined by the IRS. Passive income results from an LLC in which you don’t materially participate in its business activities. This is extremely rare. The IRS also narrowly defines passive income as income derived from rental activity. We’ve helped several clients invest in real estate in connection with a traditional LLC and their income is considered passive. These clients not only enjoy the liability protection of an LLC, but their rental income escapes self-employment taxes. However, they’re still required to report any rental property income on Schedule E, Supplemental Income and Loss.

Don’t Be Intimidated About Single Member LLC Self-Employment Tax

As you can see, the self-employment tax is something all single-member LLC owners should consider when structuring their LLC. Nearly 100% of profits from the business are subject to self-employment taxes. However, don’t let this tax overshadow the protection and otherwise simpler taxation a traditional LLC provides compared to corporations or sole proprietorships. We can help set up your LLC in a way that retains both tax simplicity and protection. Call us today at [GLOBAL VAR=phone-number] for a consultation.

3 LLC Basics Investors Need To Know

Since the 1970’s, the traditional LLC has been the business entity of choice for smart business owners and investors. These popular LLCs are a type of “pass through” entity that make up a huge chunk of U.S. companies. Don’t waste hours going down the LLC rabbit hole. In this article, we’ll review three LLC basics you should know about, plus details on how to start an LLC today.

#1 The Traditional LLC is a Pass Through Entity

The traditional LLC is considered a pass-through entity because its profits and losses pass through the individual. This is why profits and losses are reported on the personal tax return, as opposed to a separate business filing. Although the LLC’s financials are filed within the personal tax return, the individual still enjoys protection from personal liability in the case of any negative action related to the LLC. In this sense, the traditional LLC provides owners with the same protections as they would get with a corporation.

This guy is coming after your assets. Are you ready?

#2 The Traditional LLC Protects You From Lawsuits

The liability associated with real estate is no exaggeration. We’ve seen several prudent investors hit with frivolous lawsuits in connection with their property.

Let’s look past the abstract and examine a practical example of an LLC providing personal protection. Think of the case of my good friend Kelly. Like many of you, she’s a real estate investor. A tenant claims that she was injured in one of her properties. The tenant wants to hold Kelly accountable for negligence in maintaining some wood paneling which collapsed causing minor injury.

A lawsuit would do tremendous damage to Kelly’s name. However, under an LLC, Kelly as a member can’t be named in the lawsuit. Members or managers of an LLC are insulated from personal liability. Thus, Kelly can enjoy the potential profits of real estate investing without assuming the high personal liability.

#3 The Series LLC Is A Different Beast

We see only rare cases where real estate investors hold a single asset requiring LLC protection. In most cases, investors handle multiple assets. However, it’s not cheap to form an LLC for each. You don’t want to protect one from liability, yet leave the others exposed. Yet, you don’t want to pay upwards of $800 and maintain separate administration of each.

The solution is the series LLC. We’ve already discussed the benefits of a series LLC. However, not every state recognizes this entity.

How Do You Set Up A Basic LLC?

These are the two main documents to file when forming a traditional LLC:

Articles of Organization. This is usually filed with the state’s LLC division. Today, several states provide a simplified one page form. Here you will list name, contact information and other basic information regarding the LLC. Note that the filing fee can range from $100 to $800.
LLC Operating Agreement. While this is not mandatory for state registration, it’s a must for specifying member rights, responsibilities and profit shares.

Royal Legal Solutions can help you set up either a basic (traditional) LLC or series LLC based on your state requirements and liability protection needs. Call us today for a consultation. Don’t wait until you are facing a lawsuit. We specialize in creating proactive asset protection plans customized to suit your needs.