Chapter C corporations: These are traditional corporations with
generally more than about 50 employees.
Chapter S corporations: These are small business corporations
with flow-through taxing to the owners.
General Partnerships: Partnerships with various owners who all
share in the liability.
Limited Partnerships: In a limited partnership, one or more
"general" partners manage the business while "limited" partners
contribute capital and share in the profits but take no part in
running the business.
Limited Liability Partnerships: These are partnerships that
limit the liability of each partner. There is no distinction between
a general and a limited partner. All partners have limited liability
and can be actively involved in the business.
Now, on to LLCsÖ
LLCs are similar to Chapter S corporations, except they can exist
for a defined period of time. Owners receive the tax advantages of a
partnership, while also receiving the protection of a corporation. To
make it even better, all states except Massachusetts allow an LLC to
be formed with one person.
LLCs may be formed for most businesses, except some professional
businesses that require licensing for protection of the public.
Generally, doctors, lawyers, accountants and other professionals
cannot use an LLC to practice.
Another reason to set up an LLC is that some states and other
government agencies require either a U.S. social security number or a
federal tax I.D. number to invest in foreclosed properties. For those
of you living outside of the United States, this is a great way to
obtain a federal tax I.D. number.
Summary of LLC benefits:
- Allows for partnerships with limited liability.
- Helps protect personal assets of owners or members.
- One owner/member allowed in all states, except Massachusetts.
- May not require an annual shareholder meeting, like Chapter C
and S corporations.
- Favorable tax status ñ can be set up and taxed at ownerís tax
rate (default) or as a company (requires filing other paperwork).
- New series LLC makes structuring for multiple properties easier.
How does an LLC work?
First, decide whether you will be setting up the LLC yourself or
whether you will contact an attorney or accountant. If you are
planning to do it yourself, then decide where you will set it up. You
do not have to set up an LLC in the state that you reside in; however,
it may be easier. If you plan on setting it up in another state, you
will probably need an agent or representative who lives in that state
to act on your behalf. There are companies that will gladly do this
for a small annual fee.
Decide on the structure of the LLC. There are two main types of
LLCs. One is called a member-managed LLC and the other is called a
manager-based LLC. A member-managed LLC essentially says that all
owners ("members" in LLC lingo) are equally responsible for management
of the LLC. A manager-based LLC says that certain members (the
"managers") are given authority to run the LLC.
Decide on a name. Check your stateís requirements. Usually the name
must incorporate "LLC," "Limited Liability Company," or some other
variation. An example would be Apex Properties, LLC. Check with the
state to make sure the name has not been taken, before filling out the
paperwork.
To set up an LLC, you really only need to fill out an Articles of
Organization; however, you should also have an Operating Agreement
that specifies the details of ownership, compensation, voting rights,
etc.
Here are my two favorite states to consider:
You may want to factor in where you live and consider setting up an
LLC in your own state, especially if you are only investing in your
home state.
Nevada LLCs
The state of Nevada, which is very pro-business, ranks second in
the country for the formation of new corporations. State laws provide
many advantages related to taxes, privacy and liability that together
make setting up your limited liability company in Nevada particularly
attractive. Letís take a closer look at some of these benefits.
A big advantage to incorporating in Nevada is that the state
imposes no income taxes on either its citizens or its corporations.
Therefore, profits made by your LLC are not taxed. Additional
corporate taxes that are not collected in Nevada include the
following:
- franchise tax
- capital stock tax
- stock transfer fee or tax
- tax on corporation shares
- succession tax.
A high level of privacy with respect to ownership in a corporation
is provided for by Nevada laws. For example, there is no law requiring
that stockholder names be filed with the state and be made public
record. Another example is Nevada Revised Statute 78.257, which
imposes strict sanctions against non-stockholders who attempt to
inspect corporate documents or use them for purposes contrary to the
interests of the stockholders. Because of these and other privacy
provisions, and for budget reasons, Nevada does not keep much
information on its corporations. As a result, unlike other states
Nevada has no information sharing agreement with the IRS and has
refused IRS requests for reciprocity.
Nevada is a state with charging order protection of assets. In
other words, a creditor or suing individual (and even the IRS) is only
entitled to distributions made from the LLC, through a charging order.
As long as the LLC doesnít make any distributions ñ and, since the
purpose of the LLC could be for long-term investments using your
self-directed IRA, no distributions are made ñ assets of the LLC are
protected.
A new benefit to setting up a Nevada LLC is the ability to
structure your LLC as a series LLC. What this means is your base LLC
can contain subunits or sub LLCs within the parent LLC. Sounds
complicated, so why the heck would anyone want to do this? The answer
is to separate distinct businesses or properties from one another.
For example, you can set up a parent LLC (i.e., Apex Properties,
LLC). Now, letís say that you set up Apex Properties for your
construction/remodeling business and you decide to buy a large tract
of land to develop. Traditionally, you might set up another LLC for
this new business venture or risk hurting your remodeling business. In
a series LLC, you simply add this new business as a separate series
within your existing LLC. This new business venture can even operate
for a defined period and then it can be dissolved without affecting
the status of your parent LLC.
Now, letís take it a step further. You can even set up a series LLC
and put each rental property or tax deed within its own series.
What about fees?
To set up a Nevada LLC, you will have to pay the following fees:
- $75.00 articles of organization filing fee
- $125.00 list of managers or members annual fee
- $ annual resident agent fee, if you don't live in the state.
Stay tuned for my next newsletter on How to Set Up a
Self-Directed IRA.
A Slice of Europe (Update)
I just wanted to let everyone know that Bryan and I havenít
forgotten about sending you information on investing in Europe. We
decided to make another quick trek to land of Espresso and Baguettes
at the end of this month. We are meeting with several real estate
companies and previewing some properties ahead of time. Thanks for the
interest Iíve already received. If youíve contacted us already, we
will give you more details when we return. Clear your schedules for a
trip to Europe the week of May 22nd.
Adios,
Michael Williams
P.S. For new Rogue Investors, previous newsletters are archived at:
