The best way to
understand a corporation, limited liability company (or even a limited
partnership) is to realize that each creates a special legal relationship or
privilege between the business owner(s) and the government. These areas of
government include:
-
State Government
(including state taxing authorities and the state court system)
-
The Federal
Government (specifically the IRS and the Bankruptcy court system)
You may be saying,
alright Darius, I still don’t understand what you mean by a relationship or
privilege. The best way that I can put it is this:
A business entity is a
legal relationship which allows for certain privileges. When teaching
people about entities, I like refer to an often forgotten fact: In England
during the colonial period the ability to create a corporation required an
exclusive grant (i.e., permission) from the Crown (that’s right the King or
the Queen!). Remember a business entity is a privilege!
Here is ANOTHER tidbit:
Did you know that WHEN the original 13 colonies were established, many were
actually corporations or similar form. For example, the Maryland Company
was used to settle and develop…you guessed it, the State of Maryland. Other
examples include, the Virginia company, the Massachusetts company and
others. Why would someone use an entity to explore and colonize the New
World? The reason is that colonization and exploration were risky
investments. Ships were lost at sea, diseases ended the lives of thousands,
and a host of other risks were present with each expedition.
By setting up these
expeditions as corporations investors could contribute money but were only
be liable for the amount invested. In other words, these early arrangements
promoted exploration, development, and commerce by limiting liability for
investors. The same reasoning is true today. When liability is limited to
what you contribute to a business, people are more likely to start
businesses. THE REASON: Less risk if everything goes wrong BUT more to GAIN
when things go RIGHT!
The point of these
historical facts is to make it clear that the purpose of a business entity
is to limit the liability of owners/investors to the amount contributed to
the business. These facts should also make you realize that liability
protection is a privilege.
why should you be concerned about liability protection?
I am not here to scare
you…but use common sense. Real estate businesses require you to deal with
numerous parties, including:
tenants, sellers, partners, investors, lenders, management companies,
independent contracts, employees, and others. The more parties you
deal with the more likely it is that something may not go as planned.
The first step is to
learn how to run your business in fair and careful manner…so that you reduce
the chances of getting sued. Always remember this: A business entity (LLC,
corporation or limited partnership) is not an excuse to act in a careless or
negligent manner. You need to be fair when dealing with all parties and you
need to outline agreements with partners, vendors, contractors, etc. You
need to respond to tenant’s complaints regarding rental property. In short
you need to become a MASTER good business practices. I spend a considerable
about of time in my courses covering a topic I call
‘Lawsuit Avoidance 101’.
This means that we teach you good business practices to help you reduce the
risk of getting sued.
It’s simply
so important!
Another issue to keep in
mind is that since you will be dealing with
tenants, sellers, partners,
investors, lenders, management companies, independent contracts, employees,
county agents, you may get into the position where you will need to
assert your rights. In other words, you may need to take another person to
court, because your rights have been violated, a contract has been broken,
or money has not been paid to you. Many times when you assert your rights,
you may then be sued by the party you are taking to court. I know this
sounds harsh…but it happens! This is called a ‘cross claim’ and it means
that the party who is being sued is now also suing. Usually this happens
because the other party’s attorney believes that they have a claim and/or
they will be in a better position using a cross claim. Basically this means
that for you to assert your own
rights, you may risk getting sued.
ALWAYS REMEMBER THIS:
There are also steps you can take to allow more chances for a pre-lawsuit
settlement. This makes the lawsuit truly a last resort. Ask this
question: Do you have alternative dispute resolution clauses in your
agreements? Obviously, if you can settle matters outside of court via an
alternative dispute resolution method, then may be a big advantage and a
savings of time and money. An alternative dispute resolution clause will
require parties to work at settling a claim through mediation or another
non-litigious (and less expensive) manner. Again, a lawsuit should be the
absolute last resort. We cover all of these areas in more detail for
investors because it something that most people and even some attorneys
leave out!
There are also tax
advantages and disadvantages to recognize when selecting an entity for your
business. We will discuss these in later articles.
To learn more about
which entity may be best for you and how to create, run, and maintain an
‘iron clad’ LLC or corporation, you don’t need a grant from the King or
Queen…but you should see Mr. Barazandeh’s,
Incorporate
for Wealth ™ and Wealth Building LLC ™ courses.
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The author, Darius M.
Barazandeh, Esq. is a licensed attorney in the state of Texas. In
addition to his legal knowledge he has a Masters Degree (M.B.A.) in
Business Finance and brings experience from numerous fields
including tax sale investing, real estate construction, corporate
finance, and business consulting. Frustrated by the lack of
realistic information regarding tax foreclosure sales and other
investments, he is "unlocking the secrets" to many of these creative
investment methods with his unique 'clear cut' writing style,
attention to detail, and legal knowledge.
Current Membership Includes:
-
Real Estate, Probate, and Trust Law Division of the Texas Bar Association
-
Business Law Division of the Texas Bar Association
-
Taxation Division of the Texas Bar Association
-
Environmental and Natural Resources Division of the Texas Bar Association
-
Alternative Dispute Resolution Division of the Texas Bar Association
-
Consumer Law Division of the Texas Bar Association
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Attorney's
Step-by-Step Guide: To Investing In Tax Lien
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The Complete,
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