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LLC, Corporation Formation |
What are the main advantages of forming an LLC?
- Owners of an LLC have limited liability for business debts.
- For tax purposes, the allocation of profit and loss of an LLC need not be proportional to ownership interests.
- With an LLC, there is no double taxation threat since the LLC is not a separate taxable entity.
- You do not need to be a US citizen to own or invest in an LLC.
- Allows for an unlimited number of members.
What are the main advantages of forming an S Corporation?
- An S Corporation is said to have less risk from government audits as a corporation (as opposed to sole proprietor or LLC)
- Owners of an S Corporation have limited personal liability for business debts
- With an S Corporation, owners can use corporate losses to offset income from other states.
- Owners of an S Corporation can save on employment taxes by taking distributions instead of salary.
- With an S Corporation, there is no double taxation threat because the corporation is not a separate taxable entity.
What are the main advantages of forming an C Corporation?
- An C Corporation is said to have less risk from government audits as a corporation (as opposed to sole proprietor or LLC)
- Owners of an C Corporation have limited personal liability for business debts
- With an C Corporation, owners can use corporate losses to offset income from other states.
- Shareholder can be a foreign citizen.
- Allows for an unlimited number of shareholders.
Differences between an LLC and a S/C Corporation
- An LLC is simpler and faster to form. It may be formed in one step, while an S/C Corporation election can only be made after a General Corporation is formed first.
- An LLC is not required to hold annual meetings or to keep formal minutes, while an S/C Corporation is required to do so.
- LLC members can split profits/losses in any way they choose. In an S/C Corporation, shareholders must receive dividends according to the number of shares that they own, regardless of the amount of effort put into the business.
- While foreign citizens can own an LLC or C-Corporation, only United States citizens and resident aliens may own an S-Corporation .
While many business owners are enjoying the simplicity and flexibility of the LLC, it may not be the best choice in every case:
- If you are professionally licensed and live in California, you may not be able to form an LLC.
- Enticing or compensating employees with stock options or stock bonuses requires forming a corporation since LLC's do not issue stock.
- S/C Corporation shareholders pay Medicare and Social Security tax only on money received as wages or salary, but not on profits received as dividends or that stay within the company. Under certain conditions, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits. In particular, LLC's that provide professional services such as health, law or engineering should consult a tax advisor on this issue.
Frequently Asked Questions
1. How do I transfer the deed of a property into an LLC?
- An LLC must be formed before a deed can be transferred to it. A service company can help properly form and maintain an LLC.
- A deed must be prepared in the LLC's name, signed by the grantee, notarized, and recorded in the appropriate office(s) (usually the recorder of deeds office where the property is located).
- There are many types of deeds, which may differ based on the types of warranties provided.
- The ability and steps necessary to transfer a deed to an LLC may depend on whether the property is subject to a mortgage.
- We recommend that property owners consult a lawyer to ensure that the transfer is done properly.
2. Will a mortgage company lend an LLC or corporation money? Is it easier for an LLC or a corporation to get a loan or mortgage?
- A company can obtain a loan from a mortgage company, but must qualify under certain criteria, including a thorough credit check of the borrower.
- Before applying for a loan, the applicant should determine the proposed amount of the loan, how the loan proceeds will used by the company, and the company’s expected source of funds to repay the loan.
- The real estate purchased by the LLC or corporation typically must be pledged as collateral for the loan.
- Lenders typically will perform credit checks on the company and/or its owners to assess creditworthiness. Lenders may also evaluate the company’s cash flow, assets, and financial condition.
- Lenders may ask the company's owners to guarantee the loan and/or provide additional collateral.
- Generally, a company’s ability to obtain a loan will not depend on whether it is an LLC or a corporation.
3. If I have properties in several states, where should I incorporate? What if I cannot afford to qualify in all the states at once?
- In deciding where to form a company, there are many factors to take into account such as the cost of formation, tax laws, and the general laws governing the operations of the LLC or corporation within each state.
- Many business owners decide to incorporate in Delaware for a number of reasons, such as certain economic advantages and Delaware’s advanced corporation and LLC laws.
- If a company does business in a state other that the state in which it was formed, it will likely have to “qualify” to do business in that state.
- Find a right service company who provides formation and qualification services in all states and in a cost effective manner.
4. Why do so many people form a limited liability company (an “LLC”) to buy real estate? Why not use a corporation for this purpose?
- Many of our customers find that an LLC provides them with a simpler and more flexible way to protect their assets from claims that might result from their real estate investment.
- An LLC may have tax advantages over a corporation. For example, an LLC with one owner may not to have file a separate tax return and its profit or loss can be included in the owner's personal tax return. A corporation must file separate returns.
5. What is a series LLC, what states recognize them and how to set one up?
- Series LLC’s are generally of interest to individuals who have several large assets (such as multiple properties) for which they desire to maintain separate liability protection.
- A typical non-series LLC will generally protect its owner's assets, but it will not protect one asset from being used to satisfy a judgment relating to another LLC asset. A properly formed and maintained series LLC on the other hand will treat each created series as a separate entity, with its own rights and obligations, and may provide additional asset protection.
- The series LLC originated in Delaware, but the laws of some other states (such as Illinois and Oklahoma) also provide for the formation of a series LLC.
6. What’s the best entity to hold real estate?
- Selecting the best entity to hold real estate investments is typically dependent on the particular circumstances involved, such as the size of the company's business, and the number of owners or members.
- Many customers find that an LLC provides them with a simpler and more flexible way to protect their assets from claims that might result from their real estate investment.
- An LLC may have tax advantages over a corporation. For example, an LLC with one owner may not to have file a separate tax return and its profit or loss can be included in the owner's personal tax return. A corporation must file separate returns.
7. How do I change my mortgage from my personal name to the company name?
- In order for an individual investor to transfer a loan or mortgage to an LLC, the investor will need to negotiate with their lender.
- Alternatively, the LLC may seek to obtain a new loan or mortgage, which can be used to pay-off the individual investor’s existing loan.
- In order for the LLC to obtain a loan with regard to a property, it will be necessary to transfer the property to the LLC.
- There may be costs and tax issues relating to the transfer of the property and making changes to the existing loans and mortgages. Given the many important issues relating to such a transaction, it is often prudent to obtain the advice of a real estate attorney.
8. Should I form an LLC for each property?
- Many of our customers form an LLC to hold and manage their real estate in order to protect their personal assets.
- One option to provide additional protection may be to properly form and maintain a separate LLC to hold each property. However there are costs and administrative burdens associated with properly forming, qualifying and maintaining each separate LLC.
- Another option may be to form a series LLC if permitted under applicable laws.
- Refer to FAQ #5 for a detailed explanation of a series LLC.
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