[Qtip]

Friend wants to buy properties and hold them "rent them out". He wants to buy at least 10 properties.

1- Should he incorporate?

2- Corporation or LLC?

Properties will be in PA, should he incorporate in that state or a different one?

[roybean]

I would incorporate as this will protect him personally. I hear that Nevada is a good state to incorporate for privacy issues.

[FixinThings]

Delaware is where all the biggies go.

[hannah]

Originally Posted by Qtip

Friend wants to buy properties and hold them "rent them out". He wants to buy at least 10 properties.

1- Should he incorporate?

2- Corporation or LLC?

Properties will be in PA, should he incorporate in that state or a different one?

Boy with all the taxes one must pay in PA (school tax, etc.) why PA??

If he incorporates in one state with income and also pays income taxes in the state in which he lives seems to me he's gonna be paying more all the way around. Tell him to definetly speak with an accountant in PA and the state he lives in before doing anything.

[Qtip]

Originally Posted by hannah

Boy with all the taxes one must pay in PA (school tax, etc.) why PA??

If he incorporates in one state with income and also pays income taxes in the state in which he lives seems to me he's gonna be paying more all the way around. Tell him to definetly speak with an accountant in PA and the state he lives in before doing anything.

Houses there are cheap and would have nice possitive income in them. Definatelly will have him check with accountant.

I mentioned delaware before to him but remember reading in the past that Delaware is not what it used to be anymore. Also wondering if it will be difficult to incorporate in one state "delaware" and what hoops you would jump to buy the properties in PA?

What company is good for incorporating trough the web?

[roybean]

It is cheaper to do it yourself. If you go thru one of those companies they will charge a lot of service fees. It is simple to do; just to the state of choice and look up the secretary of state.

[Hedwig]

It depends. Is he going to be the only shareholder of the corporation?

I always advised my clients to talk to a good corporate law attorney before making the decision. Different types of corporations carry different types of benefits, risks, and costs. Taxes are part of it, but you should never make a business decision solely for tax reasons. I can't emphasize that bolded part enough. Tax laws change, and it's not necessarily easy to change your corporate structure. In fact, under certain conditions the IRS will not allow you to change corporate types for a number of years, often as much as five.

Let me give you an example of what I'm talking about. I knew someone who did software development. He started his own business. I advised him to remain a proprietorship, at least for a while.

One of the fallacies people believe is that just because you incorporate, you cannot be personally sued. That is not true. Especially if you (or possibly you and a spouse) are the sole owners. If you do something through your own negligence, the courts have ruled that the corporate veil can be pierced and your personal assets are at risk and can be obtained through judgement. So,since he was sole owner, the corporate structure offered him a very limited protection.

Incorporating carries its own costs, not all monetary. You not only have to pay to incorporate, you may have to pay for a business license that you would not have to obtain otherwise. You must withhold taxes and pay the social security portion and payroll withholding monthly. As a corporation, you would have to pay the salary, even if you didn't have the income. You must hold board meetings and keep minutes, even if it's just you. All resolutions must be recorded. If you decide to pay dividends, you must pay them from after-tax money (the corporation has already paid tax on it) and then you as an individual must pay taxes again.

This person decided to incorporate because at that time the tax rates for corporations was 15%, and his personal tax rate was 38%. He made the decision to incorporate for tax reasons alone. The following year, the tax laws were changed, and the corporate tax was now 35%. His personal rate dropped to 28%. But he couldn't change to an S corporation for three years. In addition, corporations had to pay a personal property tax every year on the value of all assets, including furniture. So, in the long run forming a corporation cost him more money and more work.

His product (software) was low risk except something that he personally would do. He ended up dissolving his corporation and becoming an employee of a major company again.

He didn't think through, or get the professional advice, to make the right decision for his personal circumstances. That's way I advise hiring a professional, at least to learn all the benefits and risks FOR YOUR STATE. A lot depends upon what state you're in.

[Hedwig]

OK, that post was pretty long and I decided to keep the "what state" issue separte. That also depends on the state.

Big companies do often incorporate in Delaware, but a lot of the advantages are because they are big corporations that operate in multiple states.

Many people say Nevada provides more privacy, but some of this is not true. There are companies that try to convince you of the advantages and they handle all the work for you. Many of these are rip-offs.

The correct answer, again, is "it depends." When you operate in one state but are incorporated in another, you are what is known as a foreign corporation. Foreign does not mean outside the US, it means outside the state where you operate. Treatment of foreign corporations varies from state to state. In some cases, you will pay some sort of tax to the state where you are incorporated, and then you'll pay to the state where you operate as a foreign corporation. In some states, the taxes are higher or rules more stringent for foreign corporations.

It really is worth a few hundred bucks to sit with an attorney WHO SPECIALIZES IN SETTING UP CORPORATIONS before making your decision.

You should make the final decision, but you need to have all the facts before you do. This is a very complicated area of law, and so much depends on the state laws where you are operating.

I've often thought of going into this type of law when I grow up!

[Gib]

If it were me I would look into forming an LLC for each property.

[Hedwig]

Originally Posted by Qtip

What company is good for incorporating trough the web?

Originally Posted by roybean

It is cheaper to do it yourself. If you go thru one of those companies they will charge a lot of service fees. It is simple to do; just to the state of choice and look up the secretary of state.

roybean is right about this. Once the decision is made, do it yourself. The actual incorporation is pretty straight forward. Spend the money on the attorney to help you make the decision, then do the work yourself.

[centex]

The question was posed to me via PM in the past...and my answer remains the same- considering the manner in which the law can evolve, your best bet is always to pay for an hour or so of time with counsel familiar with the requirements of a particular state. Besides...not only should you have better guidance at that point, but it is also an expense that is quite likely going to be deductible.

I'll defer to the accountants among us as to whether each property ought to be its own entity. On the one hand it makes sense, but on the other hand, there are some expenses that will be multiplied x-fold precisely because the documents are prepared for each entity. Also, by staying under one umbrella, it allows you to retain a dog for expense purposes that *could* help with the ultimate tax burden.

If one really wants to incorporate for real estate purposes, it would also behoove the person or persons to ask around and see what other local landlords are doing. There is usually a management network of sorts. If you wanted to be underhanded, ask management companies for "assistance" in what they would charge to manage the properties and work in some discussion about whether they are incorporated in that state or elsewhere and whether that places you at an advantage by having their protections under the umbrella of another state's laws...

[roybean]

I posted some info on the pros and cons of corporation in business credit
Pros and cons of S Corp
I think I may have some more somewhere.

[ilovemydogs]

Originally Posted by Qtip

Friend wants to buy properties and hold them "rent them out". He wants to buy at least 10 properties.

1- Should he incorporate?

2- Corporation or LLC?

Properties will be in PA, should he incorporate in that state or a different one?

Others have given you great info, I am only going to give you my take as a landlord.
DON'T DO IT!
Instead buy a home fix it up and SELL it for a profit.
Tenants can be a big problem.
As far as incorporating goes I have it for one business and not for the others.
When you incorporate you really have to have PERFECT RECORD KEEPING and this usually will involve an accountant.
IRS looks at your returns MORE nitpicky at least I was told this, and of course you have to withold taxes .
Another thing is just because you are incorporated does not mean you cannot be sued,although many people think this is the case.
YOU CAN BE.
I feel you can make more money by buying and selling a home then buying and renting it out.
ILMD

[Hedwig]

It depends on where it is. I had one property once that I lost my shirt on. I also tried to manage it myself.

I had another property that wasn't very profitable at first, but became so over time. I had a real estate agent handle it for about 12% of the rent. Then did most of the recordkeeping and collected the rent and deposited the proceeds (after deducting their commission and any expenses they had paid for me) right into an account that I maintained for that purpose. The mortgage company withdrew the payment from that same account. I always made sure there was enough in the account to cover a mortgage payment in case the rent was late or there were expenses that took it below the mortgage amount.

I always felt that paying a management company was the way to go. To me it was worth the fee. They screened the tenants, they handled the eviction if it was necessary, the tenant called them with problems, not me.

To make sure you can deduct all of your expenses this way, you need to set it up so that you approve all the tenants, all expenses over $xxx (for us it was 200, which meant that the rental company could do things like pay the termite contract and little repairs without calling us). This still puts all your funds at risk and qualifies for you to deduct all the expenses on your taxes. You are not a business at all, you file the rental income form (I think it's schedule E) and so there is no worry about business licensces, multiple taxation, or keeping additional records. The property management company always sent a statement with the amount of the rent (income) and their fee and anything else they paid (expenses). You add on taxes and insurance (probably get the statement from the mortgage company if they're paying from escrow), figure your depreciation and you're pretty much done.

So, if you're wanting to rent them, I'd do that and not incorporate. If you're buying, fixing, and selling, you still may not need to incorporate. It depends on what you mean by investing.

[Qtip]

Thisis some great info, a paralegal friend was telling me about a client. He has a corporation and then all the properties are purchased by one corporation and afterwards he does some kind of trust? that shields each property individually?