How to Choose the Proper Entity for Your Business

First, let me state that I'm not an attorney and the rest of this article is just based on my experiences so I'd advise you to contact John Hyre at www.realestatetaxlaw.com to get some solid, specific advice on your particular situation.

Also, this article is not going to discuss land trusts, which some of you may have just stumbled upon. A land trust is not an entity. Although it is frequently used in conjunction with entities, it is merely a paper device used to shield property ownership from the public.

When I first got going, the recurring wisdom was that an investor should use a C corp for cash deals. By cash deals, I mean anything that throws off cash quickly. It might be a wholesale flip, retail assignment, rehab and retail, option, etc.

There were numerous reasons why this was and is recommended. First, the C corp offers great liability protection and allows the owner to take advantage of fringe benefits, thus draining the corp of excess profits through legitimate expenses.

What I've learned the hard way is that this entity is not necessarily better for cash deals than other entities unless you're doing serious cash numbers. By this I mean that the added benefits that a C corp offers are not available to you without a ton of cash coming in.

Stop and think about it for a moment. Are you going to generate enough cash to pay normal operating expenses like salary, marketing, funding, overhead, etc. and still have cash remaining to set up company programs for retirement, medical, insurance, education, etc.?

Typically, the answer's going to be "No", at least during the formative years. The primary downside to a C corp is that any losses, paper or otherwise, do not flow through to your personal tax return. You don't get to use them anytime soon.

When I started, the secondary recommendation for cash deals was an S corp because it did offer many of the same benefits as a C corp, yet allowed the owner to flow losses through to the personal tax return. Once the business was thriving then converting to a C corp was not difficult.

When I went through this research again about a year ago, the majority of responses I received was that I should use a Limited Partnership (LP) for cash deals with a Limited Liability Company (LLC) as the General Partner (GP). I've also heard others suggest using an S corp as the GP. Other recommendations included using an LLC by itself as the cash deal entity.

What about entities for the keepers? By that I mean any property that hangs around for a while and doesn't cash out soon. It could be a rental, lease option, or any property with owner financing, including subject to (Sub2). What I was told there was the same; that an LP with an LLC as the GP was currently best.

The point here is that if you do spend the necessary time to research this issue (and you should), you are likely to get each of these responses and possibly more.

My experience is that any of these suggested entities is better than starting with a C corp as I did. Factors that should play into your decision process include setup costs and any state-specific laws for each of the entities. For example, in my state, Texas, the LLC is much cheaper to set up than an LP. However, the LLC is also subject to franchise taxes on gross receipts over 150k and the LP is not.

Confused? I agree it's not easy to know what the right course of action is. Do you need an entity or multiple entities established before you do some deals? Absolutely not. Why go to the trouble of setting up companies for a business that you may decide to discontinue? How do you know if you'll even like real estate investing until after you've done some deals? Why do you need to set up serious asset protection until you have something worth protecting?

My recommendation would be to begin to research the various entities for your state as you continue to work your investing business. In my opinion there's no need to make things complicated in the initial stages. If there's no obvious negatives to an LLC in your state, then perhaps that would be a good start.

I would not rush out and set up a separate entity for cash deals and a separate entity for keepers as I did. I would not set up an LP as my first entity as it involves at least two partners, one limited partner and one general partner. Entities are not set in stone. With the proper guidance and counsel from good attorneys and CPA's, you can make changes to your business plans as the business grows.

Again, this is not something you have to figure out when just starting. Find someone very knowledgeable about real estate investing, like John Hyre mentioned above, and begin to ask the tough questions so you can make informed decisions. As your business grows, your asset protection can grow with it.

Thanks for reading. Until next time, good investing.

(c) Copyright 2003, All Rights Reserved.

About The Author

Tim Randle is a full time real estate investor in Round Rock, Texas and can be reached through his web site at www.TexasRealEstateClub.com; info@texasrealestateclub.com

---

Green Building Media Fact Sheet - Past, Present & Future

PastSpecialized, niche home builders began constructing resource-efficient, environmentally sensitive homes... Read More

Refinancing Your Home Loan? When Should You Refinance Your Home?

If you have a current mortgage and are unhappy with... Read More

Getting Started in Real Estate Foreclosure Investing

Decide to Invest in Real Estate Foreclosure InvestingWith the increase... Read More

Apartment Financing Explained

So you're interested in entering the world of property management?... Read More

Rehab Your Way to Wealth: The Quick Way to Fixer-Upper Success

Completely rebuilding a house is not necessary to make money... Read More

Real Estate Investors - Red Alert

How's the real estate marketing doing? Is the huge jump... Read More

Time Is A Major Real Estate Wealth Growth Tool, So Use IT And Watch Your...

In Real Estate "Time" is a Wealth Development ToolsReal estate... Read More

Don?t Just be a Real Estate Agent, be a Professional!

Buyer Broker Agreement? What's that? Most agents don't ask their... Read More

Foreclosure Home Deals

Did you know that you can save tens of thousands... Read More

How to Build Your Free House

What if you could "place an order" for the construction... Read More

Checklist for Buying a Home

I had a client who called saying that his bath... Read More

Hassle-Free Homebuying

Perhaps you'd like to take advantage of today's great buyer's... Read More

The Real Estate Market In Spain: Making Profits Out Of Sand

The Real estate market in Spain keeps gaining momentum and... Read More

Maltas Market Battle

With new destinations such as Bulgaria, Slovenia and Croatia offering... Read More

How To Give Yourself A $20,000/Year Raise Without Asking Your Boss

Why without asking your boss? Two reasons, one, he or... Read More

How to Use Color Psychology to Prepare Your Home for a Top-Dollar Sale (Part 1)

You've decided to prepare your home for sale. Whether you... Read More

Finding a Great Listing Agent for Your Home: 8 Tips

If you've decided to list your home, you'll be paying... Read More

Quality of Life in Sussex County Delaware. Facts, Statistics, Observations and even opinions!

We Sussex Countians are fortunate in many ways as we... Read More

Relocation Humor: Why I Bought A House

The Rental Experience in South FloridaReaders: This is based on... Read More

The Listing Agents Role in Selling Your California Home

Advertising to the "Public"Every home seller likes to be assured... Read More

Residential Income Property Financing: Part 2 of 3

Welcome to the second segment of a three-part series about... Read More

Real Estate Investing Contracts on Toilet Paper

Even if your real estate contract has been written on... Read More

Whats This about a Housing Bubble?

In his recent testimony, Alan Greenspan warned against the possiblity... Read More

If You Cant Afford to Retire...Move

According to Warren Bland, PhD, an award-winning author and geographer... Read More

How to Build A Rental Property Money Machine

If you are looking for a steady, income-producing investment that... Read More

Florida Real Estate Exploding For 15+ More Years?

YEEHAW!!!!!! The south will rise again!! Can't you just imagine... Read More

Family Feud with an Auction Deadline ? Adventures in Probate/ Estate Purchases

One of our investor students told us of an interesting... Read More

Real Estate Investing - Makeovers vs. Flipping

Please don't call it "flipping."Some real estate investors who practice... Read More

Internet Battleground for Future of Residential Real Estate

Real estate agents are gearing up to face the biggest... Read More

7 Different Ways Anyone Can Become a Real Estate Investor

Being a real estate investor is not really that hard,... Read More

Raising Money For Property Development

In addition to finding the right property, one of the... Read More

Preparing for a Showing

As soon as you decide to put your home on... Read More

Secrets of Making Money from Real Estate - Part 3

Great, now how do I actually INVEST in real estate?Investing... Read More