Most serious real estate investors eventually consider filing for incorporation to make their business legit. While the process can be complicated, it’s well worth the effort to protect your assets through incorporation.
Before we dive into the nitty-gritty of starting a corporation, it’s important to keep in mind that incorporation is only one option for making your business "official" in the eyes of Uncle Sam and the IRS. Depending on the circumstances, you might find that it’s preferable to form an LLC or Series LLC to protect your assets.
I recommend consulting with my team or another attorney specializing in real estate investing to make sure you choose the most advantageous option for your situation. Check out our article on Series LLC Rules to find out more on that front.
When you incorporate your business, you form a corporation, which is a legal entity that is separate from its owner. Corporations are taxed independently from their owners and can be held legally liable for corporate actions. A corporation’s profit is separate and distinct from its owners’ income.
Corporations are created by state statute, which means that each state has its own requirements and regulations by which corporations must abide.
The owners of corporations are usually referred to as “shareholders,” and there is no maximum number of shareholders that a corporation can have. In most states, shareholders can be individuals, LLCs, other corporations, and foreign entities. Most states also permit an individual to form a single-shareholder corporation.
To start a corporation, you will usually have to cover four different types of costs. These fees include a filing fee paid to the Secretary of State, a first-year franchise tax prepayment, governmental filings fees, and attorney fees.
Depending on the state of incorporation, Secretary of State filing fees can be a flat fee, determined by the number of shares authorized or a combination of both. Secretary of State offices typically charge between $100 to $250 for filing fees.
Franchise taxes are required by some states to be paid for the privilege of doing business as a corporation in that state. Franchise fees usually range from $800 to $1,000, but some states do not require this tax to be paid.
To incorporate your business, you’ll need to file a few different types of documents.
Articles of incorporation are the legal document that creates a new corporation. To start your corporation, you’ll need to file articles of incorporation with the appropriate entity in your state. In many states, you’ll file with the Secretary of State, but this can vary.
The required information for your articles of incorporation to include can differ between states, but most states require at least the following info:
Every state will charge a filing fee, which generally ranges from $100 to $500. Once the state entity processes the articles of incorporation, they will send you a certified copy that confirms that your corporation has been approved to do business in the state.
Articles of incorporation are only required if you are forming a corporation. If you decide to go with an LLC, you’ll need to file a similar document called articles of organization.
Corporations must also establish corporate bylaws, which determine how the company’s shareholders, officers, and directors will divide authority and management in the business. The bylaws will also outline how the day-to-day functioning of the corporation will operate.
People often confuse articles of incorporation and bylaws, but they serve entirely different functions. While the articles of incorporation establish the corporation’s foundation, bylaws are much more detailed and explain how the corporation will be run.
For many businesses, it may be advantageous to be taxed as an S-Corporation instead of a C-Corporation, as income from a C-Corp is taxed twice. Because corporations are separate taxable entities, your business will have to pay taxes on its profits, and then you’ll have to pay personal income taxes on the money you make from your business.
An S-Corporation, on the other hand, is what is known as a “pass-through” entity. Because S-Corps don’t have to pay their own taxes, all of your business profits are passed through to your personal income.
The default tax election for all new corporations is a C-Corp. This means if you do nothing, you’ll be taxed as a C-Corp. In order to be taxed like an S-Corp, you will need to file Form 2553, Election by a Small Business Corporation, with the IRS.
While it is possible to incorporate without a lawyer, it is not recommended. An experienced attorney can guide you through the decision-making process and ensure you pick the legal structure that best suits your business. A lawyer can also help you hide ownership of a company to maintain your anonymity.
You don't have to call us to get this done—but please call someone who knows the law.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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