POINT #
1: Many investors believe that they can create a limited
liability company (LLC) or file a corporate charter with the state and
always have liability protection. This is SIMPLY NOT TRUE. The truth is that
each of these business entities (the LLC, the corporation and even the
limited partnership) require certain key steps after the structure is
created. I always like to compare business entities to a fancy Italian
sports car or a new baby…they WILL DEMAND PROPER CARE AND FEEDING! They are
fun on the first day, but you had better know how to maintain them. You
can’t neglect the baby or take the fancy Italian sports car for a spin
without any oil in the engine. If you do then a disaster is coming! Many new
business owners believe that because they hired an attorney or service to
create their new business entity, the work is done. The truth is that what
you do after the entity is created is most important. There are countless
nuisances, details, traps which must be understood in order to MAINTAIN
LIABILITY PROTECTION.
POINT #
2: Let me add another point that most people miss: if you plan on
going into business with another investor or what you might call a partner,
consider this: What happens if there is a disagreement? Do you have to sue,
do you use mediation, do you have procedures in place to require efforts to
settle things out of court? What happens if one of the parties in the
business wants to sell their ownership interest? Who will buy it? What will
they sell it for? HERE IS A TYPICAL SCENARIO: Assume that you go into
business with your best friend Tom. Things are going great but Tom decides
that he needs to spend more time with his elderly parents. He wants to sell
you his part of the business but you tell him, “Just wait a bit, Tom”.
“Things will get less stressful soon”. He agrees but shakes his head in
doubt. The next day you learn that he has sold shares in the business to his
uncle. You now have a new co-owner. You never would have started the
business if you were going to have to work with Tom’s uncle. These types of
situations can be avoided by utilizing proper ‘buy back’ agreements between
co-owners and limiting transfer rights. Sadly, most business owners never
learn about these precautions until it is too late.
POINT #
3: For real estate investors there are always risks when the
owner of a property decides to make repairs on the property or hire someone
to make repairs for them. It does not matter if you have a business
structure or not: A business owner is always personally liable for
negligence. So if you are negligent when you make a repair or negligently
‘hire’ someone to make a repair, you can be sued personally. Don’t ever
forget these words: “BUSINESS OWNERS CAN BE SUED PERSONALLY FOR NEGLIGENT
ACTS”. It’s really important that you spend just as much time learning about
the limitations of business entities, rather than just hearing about all the
benefits!
TAX AND ASSET PROTECTION CHOICES
–
POSSIBLE CONTRADICTIONS?
POINT #
4: When trying to choose a business entity: BE WARNED! There are
a number of opinions out there depending on who you ask. I’ll try to make
this really simple so remember the following: You are fighting two battles.
The business and tax structure you choose is your weapon/protector. WHAT ARE
THESE TWO BATTLES?: 1) a tax battle and 2) a liability or asset protection
battle. In other words, when you choose a business structure type
(corporation, LLC, limited partnership) the choice for the real estate
investor will depend on the tax issues which are associated with the
business, and how well the business structure protects personal assets from
the activities of the business. Certain structures can protect the assets of
the business from personal liabilities (please see my article, ‘Corporations
and Limited Liability Companies (LLC’s): Charging Orders and the Differences
in Protection’.
Most real estate investors will
go to their attorney in order to find out which business structure makes the
most sense from a legal standpoint. Usually the main question is, “Mr.
Lawyer or Ms. Lawyer which business structure will protect my personal
assets if my business is sued?”
Later that week, the same
investor also travel across town to an accountant’s office and ask, “Mr.
Accountant or Ms. Accountant, which business structure will save me the most
in taxes?”
Notice a few things:
-
There could be different
answers. Most attorneys will have a dynamite understanding of the legal
issues (in this instance personal liability protection issues), however
they may not be as informed on the complex tax issues associated with
real estate or other industries. So their answer may be help you from a
liability standpoint, but hurt you from a tax standpoint.
-
The same is true regarding
the accountant. They may have great choice for you when it comes to
taxes, but a bad choice when it comes to personal liability protection.
Usually, the biggest trap comes in the form of a good liability
protection choice, but a horrible tax choice. This is especially true in
real estate.
If you ever receive conflicting
advice be sure to understand exactly why it is conflicting. For example, are
there really contradictions or perhaps is the professional giving you legal
advice, but not considering the tax issues. The same is true regarding tax
advice. I like to say that you need to educate yourself on all the options
available and some of the most common issues and structures that investors
like yourself use – day in and day out.
POINT #
5: All professionals are not created equally. In order choose a
capable attorney or accountant you need to be able to evaluate them. How do
you do this? An excellent way is to ask them questions which relate
specifically to your business/industry. While some investors have a pretty
good understanding of the tax and liability issues…many do not. Because of
this many business owners choose an inadequate attorney or accountant for
their business. After all how can you evaluate the accountant or the
attorney for you if you don’t understand all your options? How can you
really ask pertinent questions? How can you evaluate their skill level? How
can you really be sure what they are telling you is up-to-date?
You really need to have some
knowledge before you walk into the plush law or accounting office. It will
not only help you make the right choices, but it can also SAVE YOU MONEY! If
the attorney does not have to create an entire set of forms for you…then you
will save several hundred dollars or more. If you have run your entity
properly and understood accounting rules and IRS requirements, then there is
less work for the accountant to do. With the right information you can
choose the best professional and usually save a good deal in professional
fees. You make your life and their job easier! Get educated first!
To learn which mistakes to
avoid, how to create, run, and maintain an ‘iron clad’ LLC or corporation
please 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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