Deal Structuring Secrets

Unlocking deal structuring secrets can make or break an investment, and these powerful insights often hide within the pages of a Private Placement Memorandum (PPM).

Watch Episode 59: Deal Structuring Secrets with Seth Bradley, Esq.

Get ready to dive into the captivating world of deal structuring secrets within a PPM! Discover how these hidden gems can unlock tremendous benefits for you as a savvy real estate investor.

Deal Structuring Secrets In A Private Placement Memorandum

A Private Placement Memorandum (PPM) is a document that provides detailed information about a company's business, finances, and investment offering. Its primary purpose is to inform potential investors for private offerings, especially in real estate, about associated risks that vary depending on project specifics.

Summary Of The Offering

The Executive Summary of a Private Placement Memorandum (PPM) is a concise overview of the investment offering and the company:

Company Overview
Offering Overview
Business Model and Strategy
Market Opportunity
Key Personnel

Offering

The Offering section details the specifics of the investment opportunity in detail:

Securities Offered
Offering Amount
Price Per Security
Minimum Investment
Use of Proceeds
Risk Factors
Exit Strategy
Subscription Procedures

Rule 506(b) vs. Rule 506(c)

While similar, these rules differ in who they allow to invest and how advertising occurs.

Rule 506(b)

Rule 506(b) allows a company to raise unlimited capital from accredited investors and up to 35 non-accredited investors.

Rule 506(c)

Rule 506(c) was introduced through the JOBS Act of 2012 to make it easier for companies to raise capital. Under this rule, a company can advertise its offering and solicit investments publicly, a significant departure from the limitations of 506(b).

The choice between Rule 506(b) and Rule 506(c) depends on the company's fundraising strategy:

To include non-accredited investors or bypass the accredited status verification process, Rule 506(b) may be a suitable option for the company.
Alternatively, if the company desires public advertising and accepts only accredited investors, Rule 506(c) would be suitable.

Use of Funds

The Use of Funds section outlines how the company will allocate the capital raised from the offering across different areas.

Debt Repayment
Operational Expenses
Capital Expenditures
Acquisitions
Reserves

Misuse of funds can lead to legal repercussions and damage the company's reputation.

Company

The Company section gives potential investors comprehensive information about the company's history, operations, and products or services. Here are some key elements that are typically included in the Company section:

History and Background
Business Model
Market Overview
Management Team
Corporate Structure
Financial Information
Legal Proceedings

Management

The Management section is crucial for potential investors to evaluate the qualifications, experience, and track record of the company's leaders and their investment:

Biographies
Track Record
Ownership
Compensation
Board of Directors or Advisors

A competent, experienced management team can often be a significant factor in an investor's decision to invest in a company.

Business Plan

The business plan section overviews the company's strategy to achieve its objectives. Key elements typically included in a PPM's business plan section are:

Company Overview
Products or Services
Market Analysis
Marketing and Sales Strategy
Operations
Financial Projections
Risk Factors
Exit Strategy

Fees

These fees are usually subtracted from the capital raised, greatly affecting the net proceeds and overall return on investment (ROI). Here are some common types of expenses in a PPM:

Management Fees
Performance Fees or Carried Interest
Placement Agent Fees or Underwriting Fees
Legal and Accounting Fees
Organizational and Offering Costs
Broker-Dealer Fees
Exit Fees

Distributions

The Distributions section outlines how and when investment profits or returns go back to investors. It usually covers aspects like:

Distribution Policy
Distribution Method
Distribution Priority
Reinvestment Options
Tax Implications

Risk Factors

The Risk Factors section assists investors in making informed decisions based on their risk tolerance, investment objectives, and personal circumstances. It discloses common types of risks in a PPM.

Business Risks
Financial Risks
Market Risks
Investment Risks
Legal Risks

Investor Suitability and Qualifications

Accredited investors meet specific financial criteria set by the SEC, like having a net worth over $1 million (excluding their primary residence) or an annual income above $200,000 for the past two years (or $300,000 combined income if married).

Non-accredited investors in a 506(b) offering must be 'sophisticated' - possessing enough financial and business knowledge to evaluate the investment.

Instructions To Invest And Subscription Agreement

Instructions to Invest

This section provides potential investors with step-by-step instructions on how to invest:

amount of money
the minimum investment amount
how to transfer funds
important deadlines
any required paperwork to complete

Subscription Agreement

A contract between a company and an investor that outlines the terms of the stock sale:

purchase price
the number of shares
how the investment pays
company and investor representations and warranties
investor acknowledgment of reading the PPM and understanding the risks

Operating Agreement

The operating agreement establishes rules and procedures for managing the company or investment fund. It's a contract between partners or members outlining their rights, responsibilities, and financial interests. Includes:

Company Structure
Roles and Responsibilities
Capital Contributions
Profit and Loss Allocation
Voting Rights and Decision-Making Procedures
Transfer of Ownership
Dissolution Procedures

Key Takeaways

Mastering key aspects like management and performance fees, distribution policies, and exit strategies is crucial for a successful PPM. These elements significantly impact net proceeds and ROI, necessitating careful assessment and negotiation to protect investor interests. Diligent due diligence and skillful deal structuring are essential for successful private placements.

Master due diligence & deal structuring with our Royal Investing Group Mentoring Session. Learn from experienced investors, gain insights into their strategies, & get real-time answers to your questions. Maximize your investment potential. Sign up for our free group mentoring & become a more savvy investor.

Successfully Investing in Real Estate as a Married Couple

You've chosen a life partner and are married. You may be asking yourself, is it wise to make my spouse my business partner? The answer could be yes. You would want to be sure to have a game plan in place. Good communication would also be necessary to balance the commitments of your marriage and business. Real estate investing as a married couple can be a very rewarding and lucrative endeavor.

In this article, we discuss:

Benefits of owning a family business
Steps before starting a business with your spouse
Actions to determine how to run your business
Options for structuring your business
Tax considerations

Keep reading to develop a solid plan that safeguards your marriage and business.

Benefits of Real Estate Investing as a Married Couple

First, let's talk about why operating a business that involves real estate investing as a married couple is a good idea:

Shared goals
Peace mind
Reliability

You and your spouse will share financial goals in your business. For instance, there will not be interoffice politics to navigate, and you will both work to secure your financial freedom.

Working with someone you trust, like your spouse, there is also peace of mind. Since you trust your spouse, the business will benefit from your stability and commitment to your marriage and the company.

Before You Start Real Estate Investing as a Married Couple

Before you dive into a real estate business with your spouse, you should discuss:

How (or if) you will incorporate your business?
Who will be the owner of the business?
Who will manage the business?

After you answer these questions with your spouse, make sure to write your decisions down. Having these agreements in writing protects both of you in the event of:

Divorce
Death
Surrender of the business

No one wants to think about the bad things that can happen in a marriage, but those adverse events have ramifications for your business. That's why it's essential to have plans "just in case" different types of scenarios occur.

Options for Running Your Real Estate Investing Business as a Married Couple

In general, the IRS allows for four different types of business structures:

Sole proprietorship
Partnerships
Limited Liability Company (LLC)
Corporation

Did you decide that only one spouse will be an owner? You might choose to create a sole proprietorship or a single-member LLC.

Are both you and your spouse going to be owners? You will most likely choose either a partnership, LLC, or a corporation.

Sole proprietorship

The following conditions must be met to be a sole proprietorship:

No other employees are active in the business, including but not limited to children and other relatives
Both spouses must materially participate in running the business

Taxes on a sole proprietorship, each spouse must file:

Schedule C reporting their share of the business' income
An additional (and separate) self-employment tax form
Employee spouse receives a paycheck with federal income tax and FICA withheld

Considerations for running your business as a sole proprietorship:

Easiest to establish
Generally, one spouse is an "employee," and the other is the "owner"
You and your spouse are 100% liable if the business fails
No protection from creditors

If you want more detailed information about this business structure, check out our article, "Can My Husband And I Own Our Business Together As A Sole Proprietorship?"

Partnership

Typically a partnership:

Organizes the company so that both you and your spouse share the profits and losses
Formed via a written agreement between two or more parties
Must register in all states where it does business
Both spouses are owners

Taxes on a partnership:

Only one form is involved, so it's a little easier to file taxes
Requires your to obtain a tax ID number
May be subject to state and federal regulations and tax
"Pass-through" income means that the owner's share of the business income goes on to your income tax return
Must pay self-employment tax

Considerations for running your business as a partnership:

Has opportunities for growth
Multiple types of partnerships (GP, LP, LLP) give your business flexibility

Read up on how a Limited Partnership can structure your real estate and other business deals in "Limited Partnership for Real Estate Investors" to see if this structure will work for you.

Limited Liability Corporation (LLC)

You will want to check your Secretary of State web page for more details, but in general, to form an LLC:

Name your business
Register with your state and pay a fee
Designate an agent
The agent will receive legal notices on behalf of you and your spouse
Both spouses are owners

Taxes on an LLC:

Taxes based on your salary and profit from business
If you set up as a sole proprietor and an employee, you will pay income and FICA
Partnership--LLC does not file taxes–you pay personally on income
If you set up as a C corporation, your corporation files taxes, and you file taxes
If you set an S corporation, LLC reports income sent to you as owners, you have to report the payment but do not pay self-employment tax

Considerations for running your business as an LLC:

Enables you and your spouse to share money and other resources
Protects you from being sued directly
Shields both you and your spouse's personal assets from lawsuits
Need management plan for "what if" scenarios

If you want to learn more about how LLCs protect you, your spouse, and your assets, read "What Are The Different LLC Types USe By Real Estate Investors?"

Corporation

This business structure is a separate entity from either your or your spouse. In general, a corporation:

Each spouse is a shareholder who divides the ownership shares of the company
Individuals have invested money in the business
Incorporation can be complicated
Payout in dividends based on level of investment

Taxes on a corporation:

If you set up as a C Corporation, your corporation files taxes, and you file taxes (double taxation)
If you set an S Corporation, LLC reports income but is sent to you as owners, you have to report the payment, but do not pay self-employment tax

Considerations for running your business as a corporation:

Taxation is more complex
S Corporations have "Pass-through" income which means that you must include your owner's share of the business income on your income tax return
You may qualify for a qualified joint venture

Final Thoughts

Real estate investing as a married couple can be a massive advantage for both of you. You can secure your financial future together and reduce your tax burden. However, it's essential to know how to maximize your savings as a real estate investor.

For more information about how to keep more of your hard-earned money, read the following articles:

Consider attending our FREE weekly group mentoring calls if you are just starting with real estate investing as a married couple. During these calls, we discuss topics such as: how to best structure your business, how to protect your assets, what tax savings you can take advantage of, and more. Join us for Royal Investing, Wednesdays at 12:30 p.m. EST by Registering Today.

The Rental Property Asset Protection Checklist

Keep potential lawsuits at bay by viewing the rental property asset protection checklist we have prepared for you. By doing so, you’ll be able to protect your assets without worry or distraction.

The following checklist recommends some protective measures you can take for your real estate investments, cash, other assets, and financial future:

Anonymous Land Trust
Setting up a Traditional LLC
Benefits of a Series LLC
Everyday situations to avoid ending up in court

The bottom line is that the best asset protection strategies stop lawsuits from happening. This list will help you decide how best to protect your assets.

Anonymous Land Trust for Rental Property Asset Protection

Anonymous Land Trusts are highly effective but lesser-known instruments that protect your privacy as a real estate investor.

One vital benefit that anonymous land trusts provide is that unknown ownership makes it harder to file a lawsuit against you.

Here are some frequently asked questions about a Land Trust:

What are the parts of a land trust?
They are vehicles to help savvy investors hold properties anonymously. An anonymous land trust has three components: a grantor, a trustee, and a beneficiary.

How does a land trust work?
When you decide to form a land trust with Royal Legal Solutions, we serve as your trustee and manage the trust. You are the beneficiary which means you (1) are not publicly identified and (2) can enjoy the profits from your property.

Read “Anonymous Land Trust for Real Estate Investors” and get more details to help you decide if this sound legal strategy is the right solution.

Setting Up a Traditional LLC

Limited Liability Companies (LLCs) legally separate you from your business.

Benefits of an LLC:

Guarantee of personal security
Simple to create, simple to manage
Relatively inexpensive

We want to provide accurate information so you can make a sound decision. To that end, here are the most common drawbacks to using a Limited Liability Company:

Puts “all your eggs in one basket”
Expensive tax preparation
Not replicable on its own

Read “Texas LLC for Real Estate Investors” for more information. Ultimately, LLCs are okay for one asset, but a Series LLC is better for multiple assets.

Benefits of Setting Up a Series LLC for Rental Property Asset Protection

Series LLCs, a “parent-child” structure that ensures protection for your assets. Here are the steps of the structure:

Set up a Series LLC (this is the parent)
Create individual LLCs (these are the “child”)

Benefits of a Series LLC:

“Child” LLCs have no additional filing
Further minimizes your liability
Ideal for investors with multiple properties or types of assets

You might be having questions about a Series LLC. Here are the most common questions we encounter about this legal structure.

How does the Series LLC protect my assets?
Each asset is isolated from others.

How can I minimize my losses in a critical case?
The Series LLC structures your business in such a way that only one asset is at risk in any given lawsuit.

Why would I need anonymity?
If people think you own nothing, they have no motivation to sue you. Thus, the anonymity of the Series LLC shields you from lawsuits.

Read “Series LLC for Real Estate investors” to get a detailed account of how a Series LLC might benefit you. Overall, Series LLCs primarily help real estate investors with multiple properties or types of assets.

Avoid These Common Situations to Stay Out of Court

When you sign a lease with a tenant, you begin a legally enforceable contract that covers the terms of their tenancy.

Your tenant pays rent, and you conduct repairs and maintenance in exchange. When your tenant feels like they have no options, they might seek to sue you.

You don’t want to end up in a lawsuit, so make sure to:

Keep the living environment habitable
Refund security deposits when the tenant has fulfilled their obligation
Keep the property safe and injury-free
Respect your tenants’ privacy
Follow eviction laws
Adhere to the Federal Fair Housing Act
Keep following state tenant laws
Avoid credit abuse

Use this checklist as a guide to help you decide what type of asset protection is right for you. No matter what level of real estate investor you are, you need to protect your assets. Make sure to apply the lessons from this checklist today.

Bottom Line: Protect Your Assets

As you continue along your real estate investing journey, ensure that you protect your assets with the right financial strategies and business structures in place. Learn how to get bullet-proof asset protection with our FREE, 5-part educational series for savvy real estate investors.

Request your access to the Royal Academy Asset Protection Vault today!

How to Choose Which State to Register Your LLC In

You are taking the first step to financial freedom–you have started your own real estate investment business. After researching the next step, you've decided to form a Limited Liability Company (LLC). That's a good idea because an LLC provides some personal liability protection if your business is sued.

You care about protecting your assets. Do you want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Your home state is the state in which you conduct your business. For example, if your real estate investment business is in Texas, you should form your LLC in Texas.

How do you know if you are "conducting business" in a state? Here is a list of things that characterize "conducting business" in a state and should influence your decision about where to form your LLC:

Most of your revenue is generated within the state
Physical presence in the state
Your business is physically in the state
Your employees (or you) work in the state

You can choose to form an LLC in another state, but then you have to register your LLC in your home state. This is problematic because you will:

Operate as a foreign LLC
Pay fees in your registered state
Pay fees in your home state

In most cases, your home state offers the cheapest and safest route for registering your LLC.

What's The Best State For A Single-Member LLC?

A single-member LLC is a type of incorporation that recognizes the LLC as having one owner. It has all the same benefits and drawbacks as a multiple-owner LLC.

The best state for forming a single-member LLC is Nevada. Nevada is the top choice for a single-member LLC because:

Privacy--there is no need to disclose the members of your LLC
No state taxes
Asset protection

The importance of anonymity for your LLC cannot be overstated, so Nevada (which provides total anonymity) might be the right choice for you.

One downside to incorporating in Nevada is the negative perception associated with the state. Nevada is stigmatized by the persistent belief that a business incorporated in the state but conducting business elsewhere is a front for organized crime.

What's The Best State For LLC Asset Protection?

Negative perceptions notwithstanding, Nevada is also the best state for LLC asset protection. The state's heightened asset protection dictates that your business liability is kept with the corporation.

In most other states, your LLC will protect against liability. These protections are not complete–some states provide avenues for liability to affect your assets if your corporation causes damages. Nevada does not.

However, Nevada does not require you to list your company's assets for the state. Coupled with the robust privacy laws, incorporating in Nevada provides the best protection to your privacy and assets.

What's The Best State To Start a Business For Tax Purposes?

Delaware, Nevada, and Wyoming are business-friendly states. If you decide to incorporate in one of those three states, you have the opportunity to benefit from the states' tax benefits. You don't have to live nor operate your business in Delaware, Nevada, or Wyoming to reap the rewards.

Here are some reasons why you may want to incorporate in one of the three business-friendly states:

Business-friendly rules
Ironclad privacy laws
Efficient and business keen court systems

You may wish to have the optimal tax situation but loathe the idea of relocation. It might be a good idea to incorporate in Delaware, Nevada, or Wyoming if that's you.

Why Do Some People Say Delaware Is The Best State To Form An LLC?

A little more than half of all Fortune 500 and publicly traded companies are incorporated in Delaware. They can't all be wrong!

There are myriad benefits to incorporating in Delaware, especially if you are a large organization.

Delaware offers lots of flexibility. That flexibility makes it easier for larger companies to set up shop. For example, if your business is large enough to need a board of directors and officers, those officers do not need to live in Delaware to work for your business.

Delaware has strong privacy laws. As an LLC, you don't need to provide many details about the members of your business for incorporation.

Delaware has efficient courts. Judges, not juries, decide corporate legal issues. Your judge will be an expert in corporate law, and the process is fair, objective, and efficient.

Delaware has attractive tax benefits. For instance, you do not have to pay state income tax if you incorporate in Delaware, but your business is physically located elsewhere.

Delaware is fantastic for big businesses, but smaller corporations might not get the same mileage out of those benefits. The cost and hassle of incorporating in Delaware might not be worth it for smaller companies.

What's The Cheapest LLC State?

Wyoming is the cheapest state to form an LLC. The benefits include:

No corporate income tax
No personal income tax
Strong privacy laws

Key Takeaways

An LLC provides some but not complete asset protection.

In general, it is best to incorporate it in your home state.

If certain conditions apply, Delaware, Nevada, or Wyoming may be your best bet for incorporation.

Is an LLC Structure Important for Real Estate Agents?

One of the first decisions you have to make as a small business owner (and yes, a real estate agent is a small business owner!) is how to structure your new venture.

A business structure dictates how you operate, the tax guidelines you have to follow, and what kind of legal protection you have if problems arise; therefore, it is vital that you choose the right type of structure for your business.

When you start your own real estate investment company as a real estate agent, it is doubly important that you protect your assets with the right business structure. Due to the nature of the business, it is essential that you are protected from potential consequences of litigation. Dig deeper into why an LLC structure for real estate agents is important and how Royal Legal Solutions can set you up for success.

What is an LLC?

A Limited Liability Company (LLC) is a type of business structure that protects its owners from losing personal assets if the company is sued. An LLC also offers tax advantages that differ from a Sole Proprietorship or more complex corporations.

As a business structure, LLCs are typically used by small business owners who want to limit their personal liability. This includes Realtors/real estate agents.

Is a Real Estate Agent Considered a Small Business Owner?

Real estate agents who also invest in real estate are considered small business owners. According to the IRS, real estate agents are treated as self-employed and considered a small business owner if they:

are not someone's employee
haven't formed a partnership with anyone
have not incorporated their business

If you work for yourself and file a 1099, you are considered a self-employed independent contractor in the eyes of the IRS.

What is the Best Business Structure for a Real Estate Agent?

The short version? The best business structure for real estate agents who own a real estate investment business is an LLC.

An LLC structure for real estate agents provides several benefits to real estate agent investors over other business structures. Among them:

Benefit #1: It Protects Assets

Protecting your personal assets is one of the biggest benefits of structuring your business as an LLC. If you are sued, your brokerage insurance may not cover the damages. If you operate as a sole proprietor, every single asset you own can be liquidated in a lawsuit.

When you structure as an LLC, however, your personal assets are protected. You would simply liquidate the LLC and start a new company. This is why an LLC is so important for real estate investors.

Benefit #2: It Saves Taxes

As an independent contractor, you are subject to the self-employment tax for independent contractors. The good news is that when you form an LLC and work with a knowledgeable legal real estate firm, you can choose to have your LLC taxed as a different type of entity.

An LLC is a legal designation rather than a tax designation; therefore, you can still be taxed as an S Corporation. S Corporations are not subject to the self-employment tax, which covers medicare and social security, that independent contractors have to pay, which benefits you.

Benefit #3: Self-Directed Retirement Accounts

When you structure as an LLC, you can use your LLC to start a Solo 401(k). With this account, you can buy tax-free investments, become a hard money lender and earn a high-interest rate on the money you loan. You can also loan money back to your LLC if needed.

Benefit #4: Professionalism

An LLC operates as the face of your business. When you're talking with clients about potential investment properties, speaking on behalf of a business organization rather than your personal name goes a long way. This lends a sense of professionalism and trust to those you work with in the real estate investment industry.

Work With a Legal Real Estate Team

As a real estate agent, you might not have considered the need for a corporate structure. But did you know 80% of real estate investors will be sued in their lifetime?

Are you prepared?

Don't let a frivolous lawsuit destroy your future. The correct LLC structure covers you in case your broker's insurance decides to leave you hanging. The right structure might be the difference between losing it all or just losing your LLC.

In the video below, Scott Smith, founder of Royal Legal Solutions, explains the best structure for real estate agents to pay fewer taxes through multiple tax strategies and shield themselves from litigation when deals go south.

When you work with a legal real estate team like Royal Legal Solutions, you set yourself up for success. You’ll learn how to maintain your LLC corporate structure to avoid losing your business. You'll benefit from our team’s expertise on asset protection structures that will protect your personal assets and build a wall of defense if a lawsuit happens.

Additionally, Royal Legal Solutions can help you work around the single-member LLC self-employment tax so your income is considered passive and you retain the financial benefits.

Protect Your Assets With Royal Legal Solutions

If you are a real estate agent who owns your own real estate investing company, ensure that you are protected from personal liability. Work with Royal Legal Solutions to structure your business as an LLC to avoid personal liability and gain the tax benefits of operating as a Limited Liability Company.

Want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Realtor photo by Kindel Media from Pexels

Does Your Real Estate Business Need An Employer Identification Number (EIN)?

Launching a new real estate business is an exciting and rewarding way to build your path to financial freedom.

However, as with any business, you have to pay taxes (womp womp).

And a primary way that state and federal governments keep track of what you owe in taxes is with identification numbers.

One of the first questions you'll encounter when registering your business involves your Employer Identification Number (EIN). In this article, we'll discuss what an EIN is and help you decide if you need to apply for one.

What is an EIN?

An Employer Identification Number—abbreviated on forms as EIN—is a nine-digit number that the IRS assigns and uses to identify businesses and individuals for taxation. An EIN is also known as a Federal Tax Identification Number.

As an individual taxpayer, you identify yourself with your Social Security Number (SSN). However, as the owner of most business entities, you need an EIN to apply for your business license and file your tax returns.

That's right; we said "most" business entities. If your real estate business is a sole proprietorship or single-member LLC, you can use your SSN to file your taxes.

On the other hand, the IRS requires your business to have an EIN if you do any of the following:

hire employees
operate your business as a corporation or a partnership
have a solo 401(k) or Keogh retirement plan
file for bankruptcy
buy or inherit an existing business and plan to operate it as a sole proprietorship
file alcohol, tobacco, and firearms; employment; or excise on your tax returns
withhold taxes on income (other than standard wages) paid to a non-U.S. resident

However, even if the IRS does not require your business to have EIN, many investors apply for one anyway.

Why? As you can see from the above list, having an EIN allows you to make more business moves than you are able to make as a sole proprietor. Some banks will even refuse to allow you to establish a business account or apply for business loans or credit cards without an EIN.

Some investors also feel that using an EIN can make your real estate business look more professional in business dealings. In a competitive real estate environment, an EIN can show that you take your new business seriously.

Also, using an EIN allows you to keep your SSN more secure from identity theft. For example, identity thieves can use stolen SSNs to file fraudulent tax returns. All business EINs are considered public information, but if someone looks for credit information, your EIN will be the only identification number they will find.

Does a general partnership need an EIN?

Although your general partnership may appear to be a simple agreement between two or more business partners, the IRS sees it as a separate business entity. Therefore, all partnerships—including general and limited partnerships—must have a separate tax identification number.

This requirement remains true even if your partnership has no employees. In addition, all partners must report their profits and losses on a Schedule K-1 when they file their personal income taxes.

Does a sole proprietorship need an EIN?

If you have a sole proprietorship with no employees, you may be able to file your business income taxes along with your personal tax return. You will use your SSN as your business taxpayer ID on your tax forms.

However, an EIN for a sole proprietorship is needed when you do any of the following:

change your business to a corporation
form a partnership
form an LLC
revise your LLC to be taxed as a corporation or S corporation
buy or inherit an existing business
begin bankruptcy procedures

How do you obtain an EIN?

Fortunately, unlike many aspects of launching a new real estate business, applying for an EIN is easy, and it's free.

The quickest way to apply online, using the IRS EIN Assistant tool. The process takes less than 10 minutes, and you will receive your new number immediately upon completion.

If you'd rather go the old-school route, you can download Form SS-4 and send it by U.S. mail to the IRS. The processing time for an EIN application received by mail is four to five weeks, according to the IRS website. Please note: The IRS warns business owners to beware of fraudulent online services that offer to apply for an EIN for you.

What if you already have an EIN?

If you already have an EIN and your business goes through some standard changes, you may be able to keep your old EIN. For example, if you change your business name or move to a different address, you can continue to use the same EIN.

However, you'll need to apply for a new number if the ownership or structure of your real estate business changes down the line.

What are the Benefits of Creating an LLC for Each Rental Property I Own?

Should you hold all of your properties in your own name, put all of your properties under a single LLC, or create separate LLCs for each rental property?

Are there any other ways to set up your company structure?

When it comes to asset protection, there’s really no question: there are benefits of creating an LLC for each rental property you own. If you ever face issues with litigation, your entire portfolio is no longer at stake.

If you’re found liable for some property issue and all of your holdings are under your name, your life savings are potentially on the line. There’s no reason to stay up at night worrying about your kid’s college fund because you’re not sure about one of the basement stairs in your rental. Asset protection insurance doesn’t cover everything, but if you’re smart about the way you set up your structure, you can mitigate the chances of potential lawsuits.

If you’re interested in protecting your rental properties from litigation (and if you have a significant investment in those properties, or even just a positive net worth, you should be), the question isn’t whether or not you should create an LLC, but how many LLCs you should create.

In this article, we’ll go over the benefits of creating an LLC for your rentals, how many rental properties an LLC can legally have, and—of course—whether or not you should create multiple LLCs for each rental property.

The Benefits of Creating an LLC for Rental Property

In short, it’s all about asset protection.

The benefits of creating an LLC for your properties are essentially the opposite of the drawbacks of keeping it all in your name. Disasters happen, and insurance policies don’t always cover the full scope of those disasters. If a tenant makes a claim that your insurance doesn’t cover and you’re found liable for any damages, you could lose your life savings.

If you create an LLC for your rental, the only thing at stake is your equity in that rental—which, if you’re using a significant amount of leverage—might not even be that much money. On the flip side, if you’re personally sued, your LLCs are separate. They won’t be affected by the lawsuit.

Furthermore, LLCs allow you to preserve your anonymity. This is especially important if you’re investing in out-of-state properties and hiring a professional management company. You don’t want to be contacted in the event that things go south. When the transaction appears on the auditor card, instead of your full legal name showing up, you could use a fictitious name or copy the property address and add an “LLC” at the end.

Here are some of the benefits of creating LLCs, in a condensed format:

Your personal assets are protected.
You preserve anonymity to a greater degree.
The only thing at stake during litigation is your equity in the property.

The only reason you wouldn’t create an LLC for rental properties is if you either 1) want to save a small amount of money now at the risk of losing your entire portfolio later; or if you 2) don’t understand the process. At Royal Legal Solutions, we specialize in asset protection, and we can help you find the best solution for your needs, particularly if you’re looking to protect your single-family home investments.

When Should You Have Multiple LLCs vs Just One?

If one LLC is good, why not have multiple?

If you have only one rental, you can set up a secondary LLC in addition to your primary in what’s called a “two-company structure.” This allows for even more protection. The secondary LLC will carry out the day-to-day operations of managing the rental, much like a property management company, while the primary will act as a holding company. That way, the operating (secondary) LLC holds most of the responsibility. If you get sued, it’s likely that the secondary LLC will be the one at stake—and it doesn’t have any of the equity.

Furthermore, if you own more than one rental, you can either keep repeating the above process, incorporating each rental property separately, or set up a series LLC. One of the issues with multiple LLCs is the annual costs of maintenance. A series LLC essentially just adds separate secondary LLCs for each rental property.

Are There Other Options for Asset Protection?

Another option for asset protection could be individual trusts. These operate in a similar fashion to LLCs, but there are different benefits and drawbacks. For more information, check out our article, “Should Rental Property Be in an LLC or Trust?”

A trust might offer just as much protection as an LLC, and it can even help you cut back on estate taxes, but it might require more time and resources than setting up separate LLCs. Feel free to contact us to see if it’s an appropriate solution for your asset protection needs.

Conclusion: What are the Benefits of Creating an LLC for Each Rental Property I Own?

When it comes to creating LLCs for rental property, the objective is clear: asset protection.

If all of your rental properties are in your name and you’re found liable for damages, all of those rentals, as well as your personal assets, are on the line. Asset protection insurance doesn’t cover everything (and there’s a limit to how much each policy covers). Instead, setting up multiple LLCs offers an alternative effective insurance policy against litigation.

You can do this by creating multiple LLCs or by creating a Series LLC. Additionally, if you find it appropriate to your situation, you could put each rental property in its own trust.

There are lots of ways to bulletproof your rental property investments and protect your anonymity, and we’re here to help.

Articles of Incorporation Vs. Operating Agreement: What's The Difference?

When you're starting a business, you have to think about the boring stuff.

There are legal decisions to make. There are forms to complete. Although the paperwork can seem overwhelming, these documents are essential to keeping your operation running smoothly.

One of the common questions new small business owners have concerns articles of information vs. operating agreements. What’s the difference?

Articles of incorporation and operating agreements both outline the structure of a business and define its ownership. But each of these documents serves a unique purpose, and small business owners and real estate investors often mix them up or think they are the same thing.

To help you understand which document you need for your business—or if you need both—we'll examine the characteristics of each one, including their similarities and their differences. Don't be bored ... Getting this right on the first try will increase your chance of success down the road.

articles of incorporation vs operating agreement cat

Bored? Don't be. A profitable business is exciting!

What are articles of incorporation?

Articles of incorporation (also called a corporate charter or a certificate of incorporation) is a set of legal documents that establishes a corporation in the eyes of the state. These documents, which are typically filed with the secretary of state, give the business owner asset protection by separating personal assets from the business assets.

The information included in your articles of incorporation can vary according to the nature of your business and your state's requirements. However, these documents generally include the following elements:

Legal name and address of the business
Date business was established
Business purpose
Business bylaws
Names of the business owners
Name and address of the registered agent
What share of ownership can be held by investors
What restrictions are placed on business activities

If you are filing for incorporation as an LLC, you are not legally required to have articles of incorporation. However, if your business is an S or C corporation, you must file these documents with your state.

What is an operating agreement?

An operating agreement is a legal document that establishes internal operating procedures and defines the business relationship between the members (owners) of a limited liability company (LLC). All LLCs with two or more members should have an operating agreement to protect the business' LLC status, clarify verbal agreements in writing, and legally protect the agreement in the eyes of your state.

An LLC operating agreement should include the following elements:

Description of the business operations
The succession plan if an owner exits or an unexpected issue occurs with an owner
How managers are appointed, their responsibilities, and obligations
How members vote on important issues
How the transfer of ownership occurs
How profits, losses, and distributions are handled
How records are maintained
Other information members feel is necessary

Although not all states require Series LLC operating agreements, legal experts recommend having a written agreement (or bylaws) that outlines your business operations. In addition to helping your business run more smoothly, some financial institutions will require corporate bylaws before you can open an account or get a loan.

How do articles of incorporation and operating agreements differ?

One way to look at the difference between these two legal documents is that articles of incorporation define a business as a corporation with the state, while an operating agreement defines how the business owners relate to each other. Therefore, the first one is a public document, while the second is more for internal use.

Another difference is operating agreements are often less formal than articles of incorporation and therefore are usually easier to update and adjust as the organization changes and grows.

How are articles of incorporation and operating agreements similar?

Articles of incorporation and operating agreements both outline your business structure and share some similar features. Both documents contain basic business information, such as its name, purpose, management structure, and how it will operate.

Another thing the documents have in common is that they both can contribute to the successful operation of a small business.

How do you write articles of incorporation or an operating agreement?

Both articles of incorporation and operating agreements require wording that is specific to your business, your state's requirements, and your type of operation. Vague or general verbiage can create problems down the road.

For example, here are some problems to guard against in your legal documents:

Not defining decision-making powers. Be sure to specify what decisions need to be unanimous among the members and which ones can be made by a majority. Also, clarify what constitutes a majority.
Not being specific on manager selection. Use precise language on how managers are elected or removed. If voting occurs, spell out who is eligible to vote on managers.
Not keeping the manager's powers in check. Spell out the exact duties of the manager to prevent possible abuse of power. Clearly state how and when company assets may be sold, including when a vote is needed on these decisions.

An experienced legal professional can answer questions and provide help with operating agreements or articles of incorporation. The bottom line is that while these documents can be a headache to prepare when you are launching your new business, you will be glad later that you took the time to do them right.

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How To Create A California LLC (And Why You May Want To Reconsider)

It doesn't matter if you're just starting out or have been investing in real estate for a while; protecting your assets is vital. If you live in California, you might be considering creating an LLC in California to protect your investments. However, not only can the process of forming a California LLC be cumbersome and confusing, but other business structures may actually provide you with better asset protection in California than an LLC.

Creating A California LLC: A Play-By-Play

Before we have a chat about your other options, let’s walk through the steps for forming an LLC in California, in case you decide it’s the right choice for you.

Step One: Register With The Secretary Of State

To create your LLC, you’ll need to register with the California Secretary of State. First, you’ll need to choose a unique name for your business and submit a Name Reservation Request Form to the Secretary of State. This submission will reserve your name of choice for 60 days.

Under California law, the LLC name must include one of the following LLC identifiers:

LLC
L.L.C.
Limited Liability Company
Limited Liability Co.
Ltd. Liability Company
Ltd Liability Co.

Before the 60 days is up, you’ll need to file Articles of Organization (Form LLC-1) with the Secretary of State to formally register your business.

Your Articles of Organization must include the following information:

Your LLC’s name
Your business address(es)
The name and address of an agent to receive service of process for the business
If the LLC will be managed by one manager, more than one manager, or all LLC members

Step Two: File A Statement of Information

Within 90 days of filing your Articles of Incorporation, you’ll also need to file a Statement of Information (Form LLC-12) with the California Secretary of State. You’ll also need to file an updated Statement of Information every two years to keep your business active.

Your Statement of Information must include the following information:

Your LLC’s name and Secretary of State entity number
Your business address(es)
The name(s) and address(es) of the LLC’s manager(s), or, if no manager has been appointed or elected, the name(s) and address(es) of each member
The name and address of an agent to receive service of process for the business
A description of the LLC’s type of business or services
The name and address of the LLC’s chief executive officer, if one has been elected or appointed

Step Three: Register With The Franchise Tax Board

On top of the taxes you’ll have to pay to Uncle Sam, you’ll also need to pay state taxes to California. To pay your California taxes, you’ll have to register with the Franchise Tax Board. To register to pay your taxes online, call the Franchise Tax Board at 1-800-353-9032 (or 1-916-845-2829 if you’re outside the U.S.) to begin the online registration process. If you prefer, you can also file your taxes by mail with Form 568.

Step Four: Register With The EDD and Request An EIN

If your LLC will have employees, you’ll need to register with the California Employment Development Department (EDD) and request an Employer Identification Number (EIN), also known as a federal tax ID, from the IRS.

To hire legally in California, you need to register for a payroll tax account number on EDD’s website. You’ll also need to request an EIN from the IRS using Form SS-4, which you can submit online, to set up payroll and pay federal payroll taxes. Even if you don’t intend to hire employees, you may want to apply for an EIN anyway, as it can make it easier for your business to open a bank account and apply for business permits.

Step Five: Apply For A Seller’s Permit

Finally, if you intend to sell or lease any goods, products, or tangible property subject to sales tax through your LLC, you’ll need to register online for a free seller’s permit from the California Department of Tax and Fee Administration. Under California law, you need to obtain a seller’s permit and pay sales tax on items that you sell.

Other Important Steps

California law requires your LLC to have an Operating Agreement that outlines:

How your LLC will be managed
LLC ownership
How capital will be raised
The distribution of profits and losses among members
How membership changes can occur
How the LLC can be dissolved

While California allows you to have either a verbal or written Operating Agreement, it’s strongly advised that you create a formal written Operating Agreement for your LLC to help preserve its limited liability status. Operating Agreements are internal business documents, so while you do need to have one, you don’t have to file it anywhere.

Similarly, opening a separate bank account for your business is not required, but it is an essential step for separating your business assets from your personal assets. If you commingle your assets, you may risk losing your limited liability status if your business is ever sued.

Disadvantages Of A California LLC

The LLC has been around for a long time and is one of the most popular forms of business entity in the United States. And it's easy to see why. But there are some disadvantages to this form of ownership, too, particularly in the state of California.

A significant disadvantage of a California LLC is the high costs of starting and operating an LLC in the state. In fact, LLCs in California must pay an annual $800 tax to the Franchise Tax Board, plus additional fees if the LLC’s total income is more than $250K.

California has also been particularly reluctant to accommodate LLCs from other states and Series LLC. If you want to start a California Series LLC, be prepared to pay $800 each year for each series.

Alternatives To A California LLC

Other business structures can provide Golden State real estate investors with better protection than a California LLC and save your hard-earned cash at the same time.

Delaware Statutory Trusts

If you’re wondering how to avoid California’s franchise tax, the Delaware Statutory Trust (DST) may be your best option. As a trust structure created in Delaware, assets held in a DST are not subject to the $800 annual franchise tax in California. You can even use a series structure with a DST to enjoy the benefits of a series LLC without the exorbitant taxes.

Land Trusts

Up until recently, the answer to “does California recognize land trusts?” was no. Recently, however, California began to recognize land trusts, allowing real estate investors to protect their investment properties without having to pay oppressive franchise taxes. A California land trust can also be used to hide property ownership, avoid probate, and create additional protections against California’s community property laws for married investors. You may also want to consider a title-holding land trust, commonly referred to as an Illinois Land Trust.

California Business Trusts

IRA business trusts are an excellent alternative to a California self-directed IRA LLC, as business trusts aren’t subject to franchise taxes. As with an LLC, you maintain complete control over your assets and investments without having to pay costly custodian fees. However, it’s important to note that a California business trust doesn’t offer the asset protection you would get from an LLC.

Taxes For An LLC: How the IRS Sees Your Limited Liability Company

If you're a real estate investor, you should be aware of how the tax code and the way you structure your business will affect how much money Uncle Sam takes from your bank account.

For example, the IRS has a lot to say about your Limited Liability Company (LLC) and how taxes for an LLC are handled.

If you don't already have one, it's time to create an LLC. Not only does owning your properties and other investments through an LLC protect you from liability, but it can also save you some serious tax dollars if you make the right elections for your business.

Buckle up! It’s time to learn the basics of how the IRS sees your LLC and what the tax benefits of an LLC are.

What Is An LLC?

An LLC is a business structure that offers its owners limited liability from the business’s debts. That means if you are the owner of an LLC, your personal assets are protected from any debts or obligations incurred by the company. You and your LLC are considered to be separate legal entities.

This type of legal structure is helpful for real estate investors because it's cheaper and easier to create than other entities like a corporation but still offers the all-so-crucial protection from personal liability.

The people or entities that own an LLC are called its “members.” There is no maximum number of members an LLC can have, and most states will allow single-member LLCs, which have only one member, to be formed.

LLC Tax Classifications

For the purposes of taxes, LLCs are considered “pass-through” entities. This means that LLCs do not pay taxes. Instead, the LLC’s profits are reported on its members’ income taxes. However, depending on the number of members in the LLC and the tax elections chosen for the business, the IRS will treat an LLC as a corporation, partnership, or a disregarded entity.

Disregarded Entities

If you own a single-member LLC, the default tax status for your business is called a “disregarded entity,” which means that the IRS ignores your LLC entirely and just considers its profits to be your personal income. This is the same way that the IRS taxes sole proprietorships. When you file your federal income tax return, you will also need to submit a Schedule C form, which details the profit or loss from a sole proprietorship.

Many states also allow LLCs to be treated as a disregarded entity when the LLC is solely owned by a married couple. However, if you form a married-couple LLC in a community property state, it will be taxed like a multi-member LLC, so it’s crucial that you do your homework before making any decisions.

Partnerships

The IRS will automatically tax multi-member LLCs like a partnership, which means that each member will receive a Schedule K-1 and include their portion of the LLC’s profits as taxable income on their personal income taxes. When LLCs are taxed as partnerships, each member must also include a completed Form 1065 for partnership taxation with their tax returns.

Corporations

Although the default tax classification for an LLC is either a disregarded entity or a partnership, members of an LLC may choose to be taxed as a corporation by submitting Form 8832 (Entity Classification Election) to the IRS. For tax purposes, there are two varieties of corporations- S-Corporations and C-Corporations.

Like LLCs, S-Corps are pass-through entities, where corporate income, losses, deductions, and credits are passed through to the business’s shareholders for federal tax purposes. With C-Corps, on the other hand, the business itself is taxed, and then each shareholder is taxed again on their earnings when they pay personal income taxes.

C-Corps are generally not the best choice for an individual real estate investor, but, in some situations, an S-Corp can save you a significant amount of moolah on single-member LLC self-employment tax.

While you must pay yourself a reasonable salary from the LLC’s profits, you can receive any income your business makes on top of your salary as a shareholder distribution instead of in a paycheck. Because the IRS considers distributions to be “passive” income, you don’t have to pay self-employment/ payroll taxes on the money you receive as a shareholder distribution.

However, this move only pays off if your LLC makes enough income to support a reasonable salary for yourself on top of shareholder distributions. Generally, this threshold is around $75K annually for a single-member LLC, but this can vary depending on your particular circumstances.

What Is The Best Tax Classification For My Business?

Unfortunately, this is not a question that any blog or article can answer for you. Not even the all-mighty Google can give you advice on this issue. Because everyone’s circumstances are different, we strongly recommend that you meet with a business attorney or tax professional to discuss the tax classification that will save you the most money.

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

When Real Estate Investors Hire Registered Agent Services For Their LLCs

As alluring as owning a real estate investment company may seem, those beautiful profits always come with a few risks.

To minimize those risks, you have to set up a limited liability company (LLC). These corporate structures, paired with the right legal tools, give your business a basic level of personal liability protection, asset protection and tax benefits.

And the logical thing would be to set up an LLC in your home state, right?

Maybe. But what if you happen to live in a state that isn’t friendly to small business?

The quick and easy solution is to form an LLC in another state, one where the tax laws are a little more favorable to what you're wanting to accomplish. This strategy can work brilliantly, and it’s 100 percent legal and even commonplace.

In fact, it’s something we help our clients do every day, every year.

But it comes with a caveat:

To remain on the right side of the law, you are required to name a person (or company) to act as your registered agent. This is the person who is responsible for sending and receiving all of your company’s legal correspondence.

If you have an out-of-state LLC, your registered agent is your point person for business matters in the state where your company is formed. This agent will be legally responsible for maintaining your LLC’s legal and tax documents and for sending and receiving all of your company’s legal correspondence.

A Professional Registered Agent Means You Sleep Easy

Your registered agent serves as your LLC’s “face.” Think of this person as your brand ambassador, but the duties go beyond simply making you look cool on Instagram. Your agent bears the responsibility for your legal and tax documents.

To have the peace of mind of knowing you are meeting the business requirements of the state where you incorporate, you need someone to assist you. Designating a registered agent for your LLC is one thing, but a registered agent service for LLCs will give you this peace of mind.

Can I be my own registered agent?

Some investors wonder if they can also serve as their LL's registered agent. Sure you can! However, you need to know this may be tedious. Will you be able to properly keep track of your LLC's documents?

Unless you’re an attorney or a CPA, you probably don’t want to serve as your LLC's registered agent. Residency can be difficult, even if you’re splitting your time between states. You must be able to perform the registered agent’s role competently throughout the life of your business. For this reason, the vast majority of successful real estate investors do not serve as their own registered agents—and they’re better off for it.

Be sure to check out our article: Do I Need A Registered Agent In Every State?

Should I get a registered agent service for my LLC?

Ideally, it is best to have a qualified professional as your registered agent. There are law firms, CPAs and other professionals who can act as registered agent for real estate investors. A qualified legal practitioner will always be aware of changes in the law. He/she has enough knowledge in matters of law.

Every state is different, but here are three common rules of thumb when hiring a registered agent for your LLC.

He/She must be a resident of the state.
He/She must have a physical address in the state.
He/She must operate during normal hours from Monday through Friday.

How Can a Professional registered agent service help?

Remember, to remain within the law, you are required to name a person (or company) to act as your registered agent.

Many real estate investors form an LLC in another state (at Royal Legal Solutions, we recommend the Texas LLC). This strategy can work brilliantly, but to remain within the law, you are required to name a person (or company) to act as your registered agent. As mentioned, this is the person who is responsible for sending and receiving all of your company’s legal correspondence. He or she will be legally responsible for maintaining your LLC’s legal and tax documents.

Registered agent services for LLCs come with a few other perks:

Peace of mind that comes with knowing someone for your LLC registered agent is is handling all legal issues
You get informed about important information and legal changes; your registered agent has everything covered.
Anyone can forget things, but your registered agent service will take note of every deadline and never miss out.

Conclusion

Each state has different rules for having a registered agent. You must retain registered agent services n the state where your LLC was created or does business.

Not designating a registered agent for your LLC is downright reckless. If you get caught, you can expect a legal backlash that may include anything from fines to exclusion from the court system, which will make it very difficult (and illegal) to run your business. Some states may even pursue criminal charges.

Knowing this, would you really risk prison time to save the $45 to $95 it’ll cost you to hire a registered agent service for your LLC? This tax-deductible fee should be regarded more as a small investment in asset protection than a shrewd cost-cutting opportunity.

A professional agent can help you focus your efforts where they belong: on your business.

What Is Passthrough LLC Income for Tax Purposes?

There are two short answers to the title question: yes, and hell yes.

But don't just take our word for it. Passthrough LLC income is a hot topic in the investment community. If you're not sure what that means, you're not alone. Read on to learn about what exactly passthrough income is, how it impacts your LLC, and what benefits you will reap from it.

What is 'Passthrough' Income?

Passthrough LLCs allow you to collect the profits from your business as part of your personal income tax. The LLC itself is not taxed, but its owners are. This allows you to save substantially, simplify filing, and enjoy more of your hard-earned profits.

Businesses love this feature so much that at the time of this writing, roughly 90% of entities take advantage of passthrough income. While this access used to be primarily the domain of giant corporations, even the smallest business can also take advantage.

How Does a Passthrough LLC Benefit Me?

The most obvious benefit of passthrough entities is that it saves you tremendously on taxes. Opting out of passthrough benefits would mean you would essentially have to pay taxes on your income twice--both on your personal and your business tax returns. Few among us have the means or desire to pay the taxman twice. Fortunately, businesses don't have to if they take advantage of passthrough taxation. This is available for any type of LLC, including our personal favorite, the Series LLC.

What About the Taxman?

While passthrough has always had the benefits discussed above, there are even more perks you can take advantage of when Tax Season rolls around. Below are some of our favorite perks, along with a little update about the 2018 Tax Bill.

Taxes Are Assessed At Your Individual Rate. This is much cheaper for the average investor than paying corporate taxes, especially if you're in the early stages of developing your real estate empire.
New Law Allows For Deductions. The 2018 Tax Bill shows even more love to small businesses and investors by allowing for additional deductions for passthrough entities. Business owners (that means you, even if you're the sole owner of an LLC) can now deduct up to 23% of the business's income on their personal returns, allowing for even greater savings.
Taxes are Streamlined and Simplified. One return means a lot less math for you. But of course, if you're struggling, are new to investing, or have a brand new entity, seek the help of a qualified attorney and CPA to ensure you're on the up and up.

Can I Get Passthrough Treatment for Other Entities?

You bet! S-Corps, Limited Partnerships, and many other types of entities are eligible for passthrough taxation. Of course, we recommend the Series LLC for real estate investors. All of the information above applies to the Series LLC the same as it would to its Traditional counterpart.

That's all for our discussion of passthrough income for LLCs and Series LLCs. That wasn't too painful now, was it? You learned the basics in under ten minutes, but please feel free to reach out for personalized recommendations by taking our Tax Discovery Quiz below.

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Which Type of Business Entity Needs an Employer Identification Number (EIN)?

Businesses pay taxes. It is a truth as old as time. However, how a business entity pays taxes vary. For many, the Internal Revenue Service (IRS) requires them to file for an employer identification number (EIN).

The EIN, also referred to as a taxpayer identification number (TIN), is a unique number assigned by the IRS that allows it to monitor any payments, wages, or other financial transactions that occur through your daily business activities.

Furthermore, if you plan to open a business bank account, an EIN will help you establish one that is independent of your own personal account.

Does a general partnership need an EIN? What about an LLC taxed as a corporation? To find whether or not your business entity requires an EIN, keep reading.

Business Entities that Do Require an EIN

C Corporations: C corporations are those considered to be your “standard” ones. These entities are required to file a Form 1120 (Corporate Tax Return) and pay corporate-level taxes.
S Corporations: S corporations, defined by Subchapter S of the Internal Revenue Code, are pass-through entities. S corporations are required to have an EIN, but they file a Form 1120S (Informal Federal Return). Unlike the C corporations, any profits or losses incurred by the S corporation are filed along with the owner’s personal returns.
General Partnerships: General partnerships are required to have an EIN for taxation purposes. In a general partnership, all partners must report profits and losses on a Schedule K-1 on their personal income taxes.
Limited Partnerships: For taxation purposes, a limited partnership operates much the same as a general one and will need an EIN. A limited partnership typically has a general partner who manages the business and limited partners who act more as investors. The general partner must file a Return of Partnership Income Form 1065 that includes any losses, profits, and distributions issues to the limited partners. The other partners will then receive their Schedule K-1 from the general partner.
Multi-Member LLCs: The IRS treats multi-member limited liability companies (LLCs) much as they do a partnership. The LLC must submit a Form 1065; a Schedule K-1 with any allocated distributions must also be filed. Members will also be required to file a Form 1040 for their share of the LLC as well. This is true whether the LLC hires employees or not.
LLCs Taxed as Corporations: As with C and S corporations, if you opt to have your LLC taxed as a corporation, you must obtain an EIN.
Single Member LLCs with Employees: If you plan on hiring employees within 12 months, or already have employees, your LLC must have an EIN. The IRS may provide you with two EINs, however. Any employment taxes that are paid, must be reported through the use of an LLC-specific EIN. However, any finances passed to an LLC member must be reported under a member EIN instead.
Sole-Proprietorships with Employees: As with the LLC with employees, a sole-proprietor who hires employees with need to obtain and EIN too.

Business Entities that Do Not Require an EIN

Single-Member LLCs without Employees: Most single-member LLCs that do not hire employees will not need to obtain an EIN. A personal social security number (SSN) will suffice. However, if the LLC has a Keogh plan or transports anything that will incur a federal excise tax, an EIN will likely be needed.
Sole-Proprietorships without Employees: Sole proprietorships without employees can use their SSN as well. It is important to remember, however, that some lenders may not provide a loan without an EIN.

Business Taxes

The nuances of the tax world can be confusing and hard to understand. If you run a business and would like to discuss taxes with a professional, call Royal Legal Solutions today to set up a consultation. Our professionals have years of experience helping clients make the most of their business while remaining in compliance with all laws and regulations.

Interested in learning more? Read How to Get an Employer Identification Number (EIN) for a Foreign Entity and When Does a Sole Proprietor Need an EIN?

Should Rental Property Be in an LLC or Trust?

Should rental property be in an LLC or trust? Unfortunately, the answer is not as straightforward as you might think.

Whether you’re planning your will or setting up a company to manage your growing real estate portfolio, you need to know exactly what type of entity you should use to shield your properties from legal trouble. If you make the wrong decision, you could potentially expose your holdings to unnecessary risk, costing you hundreds of thousands of dollars down the road (or, at the very least, giving you a big headache).

So, first, let’s start with a basic definition of "LLC" and "Trust" as they apply to real estate investing.

(If you just want the pros and cons of each option, feel free to scroll down to the bottom of this article).

Why Use an LLC to Hold Your Rental Properties?

An LLC is a limited liability company.

It’s one of the most popular legal entities that a person can set up to operate their business. You don’t need any employees or a board of directors, and you can use it to separate your business assets from your personal finances. That way, if you ever find yourself on the losing side of a lawsuit, the only assets you’ll be forced to give up are those assets held within the LLC (in this case, your rental properties).

If someone sues you and wins, they can’t take away your personally-owned assets (like your car, primary residence, and your kid’s college fund).

Sounds like a pretty sweet deal, right? You could theoretically make some risky moves with the assets you put under an LLC and then dissolve that LLC in case you get into any trouble. The only risk is the asset, right?

Well, not so fast. There are some instances when your personal assets might be at risk, and you definitely shouldn’t start an LLC for the sole purpose of doing something nefarious.

When Does an LLC Fail to Protect Your Personal Assets from Lawsuits?

There are a few instances when, if you use an LLC to hold your rental properties, you’d be putting both your rental properties and personal belongings at risk. Those instances include:

You make a personal guarantee on a debt. When you sign a contract for certain loans, including, in some cases, mortgages and home equity loans, you might have to make a personal guarantee to pay it back. That means that you’re on the hook to pay down the debt even if your business doesn’t perform. Lenders will often require you to make a personal guarantee if your LLC doesn’t have a long-established credit history or cash flow.
You sign a contract with your name, rather than your title with the LLC. Always sign contracts as “John Doe, CEO of Rental Properties LLC,” never just “John Doe.”
You mix up your personal finances with your business finances, or you fail to observe the requirements of your LLC in your state. Keep separate bank accounts and credit cards for your business and personal finances. As soon as you use your business credit card to buy groceries, a lawyer is going to make the argument that you’re using your LLC to protect your personal assets.

Furthermore, an LLC can create a kind of avalanche effect. As soon as one property is attacked under an LLC that holds multiple rental properties, your entire portfolio can take a hit.

Why Use a Trust to Hold Your Rental Properties?

You’ve probably heard about trusts as they relate to estate planning. By putting certain assets in a trust, you can guarantee exactly how and when they’re distributed. This way you can avoid a solid chunk of estate taxes, since the assets in a trust aren’t considered your personal property, or even protect your assets from heirs that are likely to mismanage them.

One solution is putting all of your properties under separate trusts. There are a few different types of trusts: revocable, irrevocable, pay-on-death (POD), and living trusts. For our purposes, we’re just going to focus on revocable and irrevocable trusts.

Revocable trusts allow you to control the assets during your lifetime. These are still considered personal assets, and they’ll be included in your estate taxes.
Irrevocable trusts transfer legal ownership to a trustee, who then oversees the exact details of how the asset should be treated according to the trustors’ will. Since this is no longer technically part of the trustor’s property, it isn’t considered in estate taxes.

What are the Benefits to Using a Trust Versus an LLC?

What are the benefits to putting your rental properties in a trust rather than an LLC?

Just like an LLC, putting your property in a trust can separate your personal assets from your business, so that if you run into legal trouble, you won’t have to forfeit your personal belongings.
It can cut down on estate taxes.
It can distribute liability. If you set up an LLC, you’ll definitely need to buy liability insurance on top of it. Even then, you could potentially lose all of your properties in a single lawsuit. If you put the properties in individual trusts, you spread out that liability.

Should You Put Rental Property in an LLC or Trust?

So, to review, what are the pros and cons of each option?

Putting Rental Property in an LLC Pros

One of the most popular ways to form a corporation. Therefore, it should be easy to file the requisite paperwork and even find guides online to help you with the specifics.
Separates your personal assets from your business assets.

Putting Rental Property in an LLC Cons

You could potentially lose all of your properties in a single lawsuit.
If you don’t follow the requirements for incorporating an LLC (like holding annual meetings and keeping your personal finances completely separate from your business finances), you could open up a lawyer to “pierce the corporate veil.” If this happens, they’ll be able to prove that you’re just using the LLC as a protection from liability while treating it like personal property.
In short, you could open up not only your rental property to potential issues, but your personal property as well.

Putting Rental Property in a Trust Pros

Effectively separate your personal property from your business assets.
By putting each property in its own trust, you can disperse liability.

Putting Rental Property in a Trust Cons

Might require more time and resources.
Less straightforward than simply setting up an LLC.

Do I Need A Registered Agent In Every State?

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

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

Where Do You Need A Registered Agent?

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

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

Registered Agent In Your Home State

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

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

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

Registered Agents Where You Are Doing Business

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

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

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

Registered Agents For Out-of-State LLCs

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

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

What Happens If You Fail To Appoint A Registered Agent?

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

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

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

Registered Agent Services

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

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

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

The Takeaway?

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

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

What Are The Different LLC Types Used By Real Estate Investors?

LLCs are one of the most popular ways to hold title to a property, providing real estate investors with a number of benefits, including limitation of liability, confidentiality, and asset protection.

Like ice cream, LLCs come in many flavors, and each has its advantages. Here is a short overview of the different LLC types and how they can benefit you.

Single-Member, Husband-And-Wife, And Multi-Member LLCs

Single-member LLC. As suggested by its name, this structure has a single member/owner. These LLCs can be formed quickly and cheaply. A single-member LLC is taxed as a pass-through entity: the owner reports business income or loss on his or her personal tax form while the company doesn't file any taxes.

Husband-and-wife LLC. A married couple LLC includes .... You guessed it ... both spouses as members. Tax treatment can be either pass-through or partnership-type when the LLC is formed in a community state. For more information on the tax treatment of a married couple LLC in community states, check out our article The Different Kinds of LLCs and the Way They Pay Taxes.

Multiple-member LLC. When an LLC has two or more members who are not spouses, each member claims profits and losses on their personal tax returns unless the company elects to be treated as S Corp or C Corp (more on these later).

Member-Managed Vs Manager-Managed LLCs

Many real estate investors take a hands-on approach to LLC management. Others prefer to hire an independent professional to operate the company and represent it in the filings.

Member-managed LLCs. This is a typical structure for a single-member LLC or a company with very few members where the owners are also responsible for the day-to-day operations. It allows each member to have a direct impact on the company's business without limitations.

Manager-managed LLCs. In this scenario, the LLC is managed by a third-party professional manager who leverages his or her expertise in operating the company. This arrangement caters to large LLCs whose operation may become unwieldy if managed directly by members. Manager-managed LLCs offer the members the benefit of passive ownership without the need to take an active role in the business, along with increased privacy.

LLC Tax Classification

LLCs give you flexibility in how you will be taxed. While an LLC is a pass-through entity by default, you may opt for different types of LLC taxation. Here's where things get fun. You stand to save a lot of money, so choose wisely.

Key terms to know:

Disregarded entity. As mentioned, by default, an LLC is a pass-through entity taxed in the same way as a sole proprietorship. In this case, the owner reports income or loss in his or her personal tax forms.
General partnership. LLCs with two or more members will be taxed as a partnership. This applies to husband-and-wife LLCs in community states as well. In this scenario, owners would show their proportional share of partnership income in the personal tax return.
Tax treatment as С Corporation. The owners can also ask the IRS to treat an LLC as either a C Corporation or S Corporation and pay taxes under the corporate tax rate. In this situation, the LLC is responsible for paying taxes on profits while the owners pay taxes on dividends. As this leads to double taxation, a C-Corporation would work for those members who prefer to keep profit in the company.
Tax treatment as S-Corporation. When an LLC is taxed as an S Corporation, the LLC is not subject to corporate income tax. Instead, the members pay the taxes on the allocated share of the income. Forming an S Corp is more work and can attract more scrutiny; some states also have additional requirements to qualify for S Corp status.

Traditional LLCs Vs Series LLCs

The concept of a Series LLC was introduced in Delaware in 1996 and quickly gained popularity. Today, Series LLCs can be established in Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah, and Puerto Rico. While Series LLCs are still not available in other jurisdictions, all states have to recognize LLCs formed in other states.

The Series LLC is different from an LLC in its traditional sense by offering a "parent-child" structure. This lets you create multiple LLCs treated as separate entities for liability purposes while having the same EIN (Tax ID) Number and operating under the "parent" LLC.

Unlike traditional LLCs, which own all assets, Series LLC lets you allocate properties to individual "child series," insulating them from potential claims to other "child series." Meanwhile, the Series LLC is a more cost and tax-efficient structure, allowing to file each one of the "child series" in the same tax return.

LLCs By State

Many real estate investors register LLCs in their home state. Meanwhile, several states have legislation that is particularly friendly towards LLCs, offering numerous benefits in terms of taxation and asset protection. Here is the list of LLC-friendly states where entrepreneurs and investors seeking additional benefits can incorporate (even if they live elsewhere).

Delaware LLC. Traditionally, Delaware provided the most flexible and liberal treatment for entrepreneurs and is a very popular jurisdiction for LLC formation. It was Delaware which has introduced the concept of Series LLC in the United States. Besides tax benefits, ease of LLC maintenance, low annual fees, and chancery court system, Delaware allows LLCs to file privately without mentioning the owners' names in public records.

New Mexico LLC. New Mexico is the only state which provides maximum privacy when forming an LLC. Unlike other states, New Mexico allows those who form an LLC to avoid disclosing their identity to the government, making it fully anonymous.

Nevada LLC. Nevada is another state with a business-friendly environment often chosen by real estate investors for LLC formation. Nevada offers strong privacy protection, doesn't' tax income on the state level, and provides for easy registration.

Wyoming LLC. Being the first US state to allow limited liability companies, Wyoming remains one of the main popular destinations for forming an LLC. With the absence of capital, state, or corporate income tax, Wyoming offers a simple setup procedure with the lowest filing fee of only $50 per year. Wyoming allows creating an LLC without making the owner's name a public record, same as Delaware, New Mexico, and Nevada.

Texas LLC. Texas is famous for its company protection laws. Unlike other states, where bureaucracy is king, the only requirement to ensure an LLC is in good standing in Texas is the "No-Tax Due" filing, which can be done online within minutes. With no annual registration fee, Texas is one the most cost-effective states for LLC formation.

Be sure to check out our article on the tax benefits of an LLC.

Where Do You Begin?

Real estate investors have options for structuring their investments and asset protection. While a traditional single-member pass-through LLC registered in the state of residence continues to be the most popular choice, there are different LLC types that may be better suited for certain situations.

The new structures, such as the Series LLC, provide additional protection by segregating assets among individual child LLCs and further limiting liability. Meanwhile, registering an LLC in one of the most business-friendly states provides for an extra layer of privacy protection, more simple filing, and cost reduction.

Without An Anonymous Trust, Your LLC (And Investments) May Be At Risk

When it comes to protecting your property, you should build a castle, not a fence. This is where an asset protection plan comes into play. Think of an LLC's protection as being on par with a fence. It offers you decent protection, but you could do better.

How? By getting an Anonymous Trust. When you compare a trust to an LLC, it's like comparing a castle to a fence. A trust offers superior asset protection you can't get from an LLC alone.

Protecting your assets is about building legal walls. When you get a trust, you're putting up high walls to defend against an attacking litigation attorney. A trust isolates your assets so even if an attorney files and wins a lawsuit against you or your LLC, they can’t get at the prize assets. Poor guys, all that work for nothing!

Why An LLC Doesn't Completely Protect You

Are you a real estate investor with one or more properties held in an LLC? If so, listen up: There are many tricky ways litigators are able to break into an LLC and get access to all your assets—even when the lawsuit pertains to a single property. The LLC will protect the properties from suits against you individually, but a lawsuit relating to the sale or lease of property will go against the owner (the LLC).

In a landlord/tenant dispute or a dispute relating to the sale of a property, the LLC is liable as the owner. If the opposing party is successful in the lawsuit, they will be able to collect on their judgment against the assets of the LLC (as in ALL of your properties). They will be able to foreclose and auction off your properties at a discount until they have collected enough money to satisfy their judgment.

Poof. There went your years of hard work, into the pocket of an attorney.

Anonymous Trusts Stop Lawsuits Dead

The more walls you have, the harder it is for the other side to recover your hard-earned assets and the more likely it is that they will not even bother filing suit. Lawsuits are a three legged stool, and a trust destroys one of the legs, which causes the lawsuit to crumble. The three stool legs which support a successful lawsuit are:

Legal liability
Injuries
Recovery

In layman's terms it translates respectively to:

The law recognizes liability either by common law or statute,
The facts show that the party suffered money damages because of the defendant's conduct, and
Assuming that previous two are true, there are assets which we can take from the defendant to satisfy the judgement.

A Trust Makes Attorneys Think Twice Before Suing You

An attorney won’t file a lawsuit without all three legs being in place. Using an Anonymous Trust/LLC combination cripples litigation because it makes the pool of assets for recovery, the third leg of our stool, unattractive. Ten properties held in an LLC makes an attorney drool like a hungry dog. That’s a lot of assets, and likely some equity an attorney can get a hold of.

A single property held in trust doesn’t even get an attorney to the keyboard to type out a petition to file suit. There just isn’t enough equity to recover against.

A Trust Is The Castle Protecting Your LLC's Assets

Let's say you have all your property held in an LLC and want to transfer each of those properties into individual trusts.

The first step toward developing your asset protection plan is to establish an irrevocable trust. You can hold property in the name of this trust instead of your LLC or personal name. Now that the trust owns the property, you or your LLC are merely beneficiaries. This entitles you to the income from the property without exposing you to liability.

In a dispute regarding the property, the opposing party will only be able to collect against the asset of the trust, the trust property, which hopefully has limited equity. Why do I hope that the trust property has limited equity? The lawsuit that is filed against the trust is limited to recovery against the trust property.

If the mortgage on the property is close to the value of the property, then there isn’t enough equity in the property to justify a lawsuit. Remember, the litigation attorney only gets paid after he auctions off the property and pays off all the liens including the mortgage. And it just so happens that there are several ways to hide the equity in your property.

An Auction Can Work In Your Favor

The fees for the auction and the costs in litigation to get it to auction are also subtracted from the equity. In the end, there is hopefully little hope that an attorney and his or her client will make any profit. Same goes for the client, who also pays large litigation fees. If neither the attorney nor the client can make money, they won’t file suit.

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

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

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

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

Starting a Business: Giving Structure To Your Idea

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

What Is a Sole Proprietorship?

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

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

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

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

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

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

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

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

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

Additional Advantages of The Single-Member LLC

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

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

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

What Is The Difference Between An Authorized Member And A Manager In An LLC?

A Limited Liability Company (LLC) is a versatile legal entity for running a business. Since its relatively recent creation (Wyoming in 1977) it has quickly become an attractive option for real estate investors due to its tax flexibility and strong legal protections.

In practical business operations, many LLCs function either through a designated manager or the collaborative efforts of its members. Under the second model, an LLC may authorize members to make binding legal commitments for the LLC.

Whichever management framework is adopted, the details need to be outlined in the LLC Articles of Organization and the Operations Agreement. These two documents are the solid foundation of an effective LLC.

Authorized Members in An LLC

An authorized member of an LLC is a member (or members) who are authorized by the governing documents to make binding legal commitments on behalf of the LLC.

LLC Managers

A manager of an LLC is either a member or an outside party tasked with performing the day-to-day functions of managing the LLC. These duties are outlined in the LLC Operating Agreement.

Typically, the manager is given the power to perform the following for the company:

Make legal decisions for the LLC
Open and close business bank accounts
Buy and sell property e.g. real estate or financial instruments
Dispose of assets owned by the company
Obtain financing
Hire and manage LLC employees

An important note on LLC managers is that the LLC Manager is not liable for fraudulent statements for the LLC or the actions of any of the members of the LLC.

Basics of LLC Operations

Before you can understand the difference between an authorized member and a manager in an LLC, you should know the basics of LLC operations. In 2018 just under 200,000 LLCs were established in the state of Texas alone. The popularity of LLCs comes from its legal protections for owners, tax flexibility, and its less formal establishment process than traditional corporations.

As mentioned, a properly established LLC requires two foundational documents: Articles of Organization and the Operations Agreement. The first key step in how to start an LLC is filing the Articles of Organization with the state to outline the formation and purpose of the LLC. Governing the actual processes of the LLC, the Operations Agreement is important to ensure an efficiently run LLC and that it affords the most protections and benefits to its members.

The owner(s) of an LLC are referred to as its “members” and the default management is a democratic vote based on the ownership percentage. All the members enjoy protection from any liabilities taken on by the LLC and the LLC is in turn protected from any creditors of its members.

That said, it is imperative that the LLC Operations Agreement is drafted correctly as an ownership interest in an LLC is not automatically protected against personal creditors. If correctly drafted, however, the most a personal creditor of one of the members could obtain is the cash distributions that that member would have been entitled to.

LLC Articles of Organization and Operations Agreement

As one can imagine, an LLC that functions the best and provides a management structure sufficient for the purposes for which it was created will have well-drafted Articles of Organization (legally required to be filed with the state) and Operations Agreement (governing the functional processes of the LLC but not a legal requirement).

Particularly, these documents will contain provisions outlining the duties and privileges of the LLC’s authorized members and managers, if any.

Your LLC: Member Managed or Manager Managed?

Logically, there are only two options for how an LLC functions from a management perspective: democratically managed by the members or managed by an appointed manager. If it is member-managed then having an authorized member imbued with the power to enter the LLC into legal arrangements will often make practical sense.

Which One Is Right for You?

As a generalization, the larger the LLC the more practical it becomes to have a manager-managed model for the LLC. Aside from the practical advantages, the other key benefit from having a manager manage the LLC is to allow for passive member investors.

Many smaller LLCs prefer to manage the company as a team with, if needed, one or more members being authorized to sign on behalf of the LLC.

In either case, the key is getting the LLC Articles of Organization and Operations Agreement drafted correctly. With well-worded foundational documents, an LLC is an ideal flexible legal entity for conducting business in Texas.

Should You Form A Single-Member or Multi-Member LLC?

All right my fellow real estate investors, let's break this down: Single member vs. multi member LLCs.

First and foremost, most of the time you can choose which kind of LLC you want. Whether a single- or multi-member company is required depends on state law.

For example, if you decide to form your LLC In Texas, a single-member LLC is fine. But in Florida, you'd need more than one member who isn't your spouse.

Single-Member LLC Vs. Multi-Member LLC

As their names suggest, the single-member LLC has one member, while the multi-member LLC has at least two members. Two heads are often better than one. This is usually true for LLCs formed for asset protection benefits.

If you get a single-member LLC, it will be your responsibility to keep records. And in case you didn't know, if you don't keep records your LLC will lose its protections, leaving you vulnerable to lawsuits.

Which brings us to our next point. In many states, a single member LLC is more vulnerable to a lawsuit than a multi member LLC. How so?

Let's say you cause a car accident while texting and you get sued beyond what your insurance policy will cover. In about 20 states, the law says creditors are allowed to come after property held in your LLC.

However, in those same states, if your LLC had been a multi-member LLC the creditors wouldn't have been allowed to come after your properties. So as you can see, whether you should get a single-member LLC or a multi-member LLC depends on what state you want to form it in.

Also, something that's worth your minor consideration is that a multi-member LLC will cost more in tax preparation. This is simply because there's multiple returns being filed.

Getting Around State Law Restrictions on LLCs

The good news is you can form an LLC in Texas and use it in any state. When the court reviews whether to uphold your Texas LLC in another state, they're going to check to see if your LLC is properly formed. If it is, you'll be protected. But if it isn't, you're screwed.

I recommend you form your LLC in Texas or a similar state with strong asset protection laws. This will prevent your LLC from being sued and having your properties liquidated on a technicality. Learn more about how the Texas LLC protects real estate assets.

If you have any questions about the single-member LLC or multi-member LLC, I'd be glad to answer them in the comments below. For personal advice about the best LLC choices for you, schedule your consultation now.

Benefits Of LLC For Rental Property Ownership

As a rental property owner, you are accustomed to solving many different kinds of problems. Ensuring you are protected in case something goes wrong is one of the problems. So we're going to talk about the benefits of having a limited liability company (LLC) for rental property investing.

This is where many owners will say, “I have asset protection insurance, so I am protected if something bad happens” It is true that insurance covers accidents, but you'll start to understand the benefits of using an LLC for rental property ownership if you watch this video:

Why an LLC Can Protect Assets Better Than Insurance

Insurance will not protect you from most lawsuits regarding the buying and selling of real estate. Every time that you're entering into a contract, selling a piece of property, or leasing property to a new tenant, insurance doesn't give you the asset protection strategy you need.

This happened to one of my clients after the sale of a property: After the sale took place the buyer emailed asking if my client had replaced the plumbing under the house. My client simply replied via email that he had replaced, “all of it.” In the context that would be understood as all the plumbing under the house. However, the buyer misinterpreted that email as referring to all the plumbing in the house.

These types of miscommunications happen all the time. Especially now that texting is more and more common between renters and their landlords! This is only one example of an issue that insurance may not cover. This is where the LLC comes in to save you.

Benefits of Owning an LLC For Rental Property

Real estate LLCs are powerful entities that separate the liability of your asset from your personal name. When there is a lawsuit against your rental property, it cannot impact your personal assets. It also means that if you are personally sued, your LLC assets will be protected. In addition, when a lawsuit occurs against the LLC, it will not impact your personal credit score.

Operating an LLC is quite simple, but must be done properly in order to reap its benefits. Forming an LLC is quite straightforward, but needs to be done correctly the first time. To create an LLC you need to select a name for the LLC that the state approves. After that, you choose a registered agent. You will need to file the Certificate of Formation and create an Operating Agreement. Finally, the state will assign you an Employer Identification Number (EIN.)

One LLC is Great! How About More?

An LLC is a great entity, but your rental property still holds a lot of liability. No investor likes having the possibility of losing an entire property to a lawsuit. Because of this, many will create additional layers of defense. The first of these layers is a secondary LLC. This LLC carries out the operations of the company. People refer to this LLC as a “shell company.”

The operations LLC doesn’t own any property. It simply functions similarly to a property management company for your “asset holding LLC.” That means it collects rent, pays contractors, and carries out the operations of that property. This tag-team duo is called a two-company structure. The operating LLC holds most of the liability and is most likely to be sued. However, you only risk the money in THAT LLC. The asset-holding LLC is not involved, and thus the rental property is still legally separated.

Have more than one rental property? You can scale your asset holding LLC up to a Series LLC. This entity scales infinitely with your portfolio. In this case, you can still be using the operating LLC to carry out the activities for all these different rentals without risking any of your properties directly.

Protect Your Investments From Claims

An insurance claim usually results from a "slip and fall" on a property or something else you would normally characterize as an accident. Typically this is what your insurance is willing to cover. But your insurance doesn't cover you for any intentional acts that might occur.

What's considered an intentional act? Well, that depends on what you consider to be intentional. And that's where the law comes in!

In the example above, my client was hit with a lawsuit alleging intentional fraud, an incident that insurance doesn't cover. Yet even after this simple misunderstanding, my client walked away from that lawsuit without paying a dime. This was all because she had a proper asset protection strategy in place.

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.

The Importance of Anonymity for Your LLC

The Limited Liability Company (LLC) has more than fairly earned its reputation as an excellent foundation for asset protection. But even the trusty LLC isn’t the be-all and end-all of your asset protection strategy. LLC anonymity is another piece of the puzzle.

True, LLCs and Series LLCs make wonderful entities for protecting your real estate investments and other high-dollar assets, but did you know these entities can actually become even stronger? The secret component that can strengthen any investor’s asset protection plan is actually critical for preventing lawsuits and even keeps identity thieves at bay. If you haven’t yet guessed, that secret ingredient is anonymity. And there’s more than one way to achieve a truly anonymous LLC.

Let's look at a few of them now.

Don’t Assume Your LLC Is Already Anonymous

Unless you made a conscious choice to buy an anonymous LLC, odds are good that your traditional LLC has membership recorded somewhere on the public record. If that’s the case, don’t panic! You can still take proactive action to increase your anonymity.

But of course, the best thing any investor can do is not compromise anonymity in the first place.

In most states, members of LLCs must be recorded by the Secretary of State. Those sites are a quick web search away, so anyone who can type can find an LLC’s owners. For this reason, most LLCs aren’t truly anonymous. If you record your real name, you can be directly tied to your LLC, which means it’s not really protecting you.

Although there’s a surprising amount of consistency between traditional LLCs, each state’s asset protection laws are unique. Most investors don’t even take an up-close look at the state statutes for LLCs/series LLCs until they’re planning to buy an entity for themselves. If you’ve already established yours, you should know if you took anonymity steps.

If your attorney took these extra steps, to make sure your LLC was anonymous, your attorney likely would have mentioned it at the time of formation.

If you have specific questions about how protecting your anonymity preserves your hard work, speak with a qualified real estate attorney as well as an advisor who is 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 real estate investing business.

Options for Forming Anonymous LLCs

We’ve chosen two of the easiest methods any investor can use to form an anonymous LLC. Let’s break down two of the most common options for real estate investors who need anonymous LLCs.

Method #1: Use Land Trusts Alongside Your LLC Structure

The Anonymous Land Trust is commonly referred to as a title-holding trust, because that’s exactly what it does. These revocable trusts can be used in conjunction with LLCs in several ways.

First, a land trust may be the owner of an LLC. So even if you must record your LLC’s ownership for the public record, you can still remain personally anonymous. The harder you are to tie to your LLC, the better protected you are. Anyone who goes digging won’t see your name on the public record, or that of your other members if it’s a multi-member LLC. They’ll see the name of your anonymous land trust.

If you want total anonymity, you can even pre-select an individual to sign in your place on business documents. Regardless, you can enjoy the other benefits of the land trust, which include the ability to easily assign interest to new partners. Anyone in your LLC or even a joint venture-owned property in a trust can be made a beneficiary of the trust. One of the many lesser-known perks of the anonymous land trust is it makes adding investors and dividing property simple.

Method #2: Purchase an Anonymous LLC From a Service Offering One

Not all real estate attorneys or even asset protection professionals offer a pre-fabricated anonymous LLC, but those who do generally can substantiate what they’ve done to make their LLC truly anonymous. If their webpage doesn’t offer an explanation on the anonymity benefits of such an offering, you can even dial up the firm and ask questions.

Keep in mind that people in all sorts of positions pick up law firm phones, so you might get a great receptionist who takes a detailed note and gets you a callback, a busier staffer who simply takes your number, or you could luck out and get to talk to an attorney briefly about your question. Most firms have staffers who can help explain their products, so don’t assume only the attorney whose name you see on the sign is the only person who can help with your question. A reputable law firm will generally have many qualified people around to help you understand their services.

Knowing how to select a good law-firm option often comes down to asking the right questions. Some key things to look for if you’re not sure about an Anonymous LLC offering include these details:

Is the Anonymous version of the product the only one available? If not, how does an Anonymous Traditional LLC differ from the firm’s standard Traditional LLC? Even if only anonymous versions are available, you can still ask for (and reasonably expect) an explanation.
What about this product is the same or difference from a comparable LLC from another firm in the same state? If you find few differences, you make want to start asking questions.
Does the Anonymous LLC product apply only to Traditional LLCs, or are there options for anonymizing Series LLCs too? If you really need a Series LLC, even an Anonymous LLC won’t be identical. It may be preferable to the common version, but you want to be sure you’re getting the entity you really want and need.
Is the law firm transparent about how they achieve anonymity? Some may use the tactics on this list, and that’s great. We’ve listed these methods because we know they work.

If you’re willing and able to ask these questions, you can shop around and find the right offering for you. Don’t be afraid to look beyond your home state, either, particularly if you live in one that only offers the Traditional LLC. You may be able to solve two or more problems, like creating an out-of-state entity for real estate and managing multiple properties, with the Series LLC—an entity available in under 20 states.

Even if yours isn’t on the list of states currently offering Series LLCs, the good news is that REIs can select any state as “home base” for business. This is true no matter what kind of company you form. Learn more about the best states for forming LLCs or Series LLCs if you are considering making this type of move. You may also be interested in our article, Anonymity & The LLC: States Where Business Owners Love The Laws.

Bottom Line: Preserve Your Anonymity to Decrease Your Odds of Lawsuits

Let’s not lose sight of why anonymity is so important. An ideal asset protection plan must contain anonymity because personal anonymity is the easiest way to maintain legal distance from the liabilities associated with your real estate assets. Whether you achieve anonymity through vigilance about online conduct and information security, via anonymous land trusts, or by forming an anonymous LLC with an attorney’s help, you’ll find the peace of mind you get when you live free of worry is well worth the effort of creating your protections.