Corporations
The advantages of incorporating are well known to real estate investors. A corporation is a legal entity, separate from you and your partners (if any), that can offer significant benefits:
• Legal protection: If you become a corporation that owns property instead of a sole proprietor, you enjoy some legal protections that you would not otherwise have. If someone is injured on your property, for example, it will be the corporation, not you, that will be sued. Your home and property may also be protected from seizure in any settlements because they are not legal holdings of your corporation.
• Tax advantages: You can pay yourself a salary and pay income tax on that figure and not on the larger profits earned by your corporation. This can be a significant advantage comparing with limited liability companies. If you sell a building for $500,000, for example, you can work with your accountant to find appropriate measures to reinvest that money in new properties or other endeavors without encountering the risk of paying immediate capital gains or income tax. (Consult with your attorney and tax advisor for advice and see Minimizing Risk-Right Insurance)
• The ability to sell stock: At some point, you can issue stock and sell it to individual investors to raise monies you need to expand your holdings and your business. Issuing stock offers other benefits such as the ability to give stock to your family or heirs or to employees as compensation. (Please consult with your attorney and/or accountant before taking this option since many laws limit corporations’ selling and distributing shares.)
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REMEMBER!
Becoming a corporation offers protection from personal liability, but it is also expensive. It is not a step to be taken lightly, even though there are plenty of places on the Internet where you can incorporate quickly and easily.
Talk to your attorney, and discuss your needs before making the decision that is right for you.
There is one significant disadvantage to becoming a corporation:
• The expense: It costs a lot of money to have an attorney draft and file the paperwork to incorporate. The cost of filing state and federal quarterly tax reports and returns can also add up quickly.
What about taxes? The tax situation of corporations depends on whether your corporation will be an S Corporation, which can pass profits directly to individual shareholders who must then pay taxes on them, or a C Corporation, which pays taxes on profits before distributing the remainder to shareholders. These are complex issues, so consult with your attorney and accountant to be certain that you are making the best decisions.
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