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In this
Issue:
Tip of the Month
The Corporation vs. the L.L.C.
Question of the month
How to Get Started as a Landlord
What's HOT!
MyCorporation.com
The
Internet's leading provider of Incorporation,
LLC Formation and Trademark Search Services |
Welcome to the Landlord
e-Guide monthly newsletter.
Our mission is to provide useful
information on ways to maximize profits and minimize risks as we
help improve the way you do business as a landlord.
Note: If you have not done so already, please take a quick
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My fellow landlords,
I apologize for
the delay in the submission of this month's issue which has now
been combined with the October newsletter. Many changes are
taking place at Landlordeguide.com and we had been working
ferociously to get them completed prior to the publication of
this newsletter. But alas, I am a perfectionist and am not
quite yet satisfied with the latest update of The Complete
Landlord e-Guide (version 2.0) and the redesign of the
landlordeguide.com website. We are also putting the finishing
touches on the new Landlord's Resource Directory companion
website which will have its own separate domain as of November
2004 at
www.landlordsresourcedirectory.com.
On top of all
these exciting changes, I have been in the midst of working
through some particularly challenging zoning issues with one of
my rental properties. I am reminded of the immense
responsibility of being a property owner and am ever grateful to
have an extremely competent team of professionals helping me
through it all. Property ownership and management is certainly
not for the faint of heart!
As always, I am
quick to make this clear to people asking my advice because too
many of them have a misguided notion that owning and managing
properties is as simple as finding a good property and getting a
good tenant. Although I'm not the pessimistic type, it would be
a great disservice not to clarify the financial and emotional
ramifications that are so much a part of investment real estate.
For every
landlord, each new tenancy comes with risks and rewards. Just
as with anything in life, there will be good times and bad and
although we can implement ways to protect ourselves from certain
hardships, it's important to always be prepared for the worst.
Once this is realized and accepted, the difficult times are more
easily endured. As I have outlined the prerequisites to
becoming a landlord in The Complete
Landlord e-Guide, I hope to realistically illustrate
the pros and cons of property ownership and landlording through
this newsletter and welcome any comments on topics you would
like to see covered herein.
Make it a great day!
Shannyn Flory
Webmaster
www.landlordeguide.com
sflory@landlordeguide.com |
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Tip of the Month:
Comparing
Protective Business Entities
The following article was published with the
written consent of My Corporation Business Services, Inc. It is
the second of two articles made available to you on the subject
of creating a legitimate property management business. This
article features the different characteristics of the
Corporation and Limited Liability Company and will help you
understand more about which one would better meet your own
needs. For more information business entities, be sure to
browse the
MyCorporation.com website.
The Corporation vs.
the Limited Liability Company
The C-Corporation
The label, "C-Corporation" merely refers to a standard,
general-for-profit, state-formed corporation. Characteristics of
the "C-Corporation" include the following:
Separate Legal and Tax Life. A corporation which
is properly formed and operated as a corporation assumes a
separate legal and tax life distinct from its shareholders. A
corporation pays taxes at its own corporate income tax rates and
files its own corporate tax forms each year IRS Form 1120.
Management and Control. Normally, a corporation's
management and control is vested in its board of directors who
are elected by the shareholders of the corporation. Directors
generally make policy and major decisions regarding the
corporation but do not individually represent the corporation in
dealing with third persons.
Thus, transactions with third persons and day-to-day activities
are conducted through officers and employees of the corporation
to whom authority is delegated by the directors of the
corporation.
Shareholders. Shareholders are the owners of a
corporation. Although shareholders have no power over the
corporation's daily activities, shareholders possess the
ultimate power in that they can appoint or remove Directors of
the corporation.
Directors. The Board of Directors is responsible
for the long-term management and policy decisions of the
corporation. While the Directors are considered to have the
highest level of DIRECT control over the corporation, there are,
however, a few instances when the shareholders are required to
approve Actions of the Board of Directors (e.g. amendment to the
Articles of Incorporation, sale of substantially all of the
corporate assets, the merger or dissolution of the corporation,
etc...).
Corporate Officers. Corporate officers are elected
by the Board of Directors and are responsible for conducting the
day-to-day operational activities of the corporation. Corporate
officers usually consist of the following: (President,
Vice-President, Secretary, Treasurer).
Management & Staff. Management and Staff are
DIRECTLY responsible for the daily activities of the
corporation.
One Person Required. In most states, one or more
persons may form and operate a corporation. Some states,
however, require that the number of persons required to manage a
corporation be at least equal to the number of owners. For
example, if there are only two shareholders, there must also be
a minimum of two directors serving on the board.
Fringe Benefits. Corporations may often offer
their employees unique fringe benefits. For example,
owner-employees may often deduct health insurance premiums paid
by the corporation from corporate income. In addition,
Corporate-defined benefit plans often afford better retirement
options and benefits than those offered by non-corporate plans.
Corporate Formalities. To retain the corporate
existence and thus the benefits of limited liability and special
tax treatment, those who run the corporation must observe
corporate formalities. Thus, even a one-person corporation must
wear different hats depending on the occasion.
For example, one person may be responsible for being the sole
shareholder, Director, and Officer of the corporation; however,
depending on the action taken, that person must observe certain
formalities: Annual meetings must be held, corporate minutes of
the meetings must be taken, Officers must be appointed, and
shares must be issued to shareholders.
Most importantly, however, the corporation should issue stock to
its shareholders and keep adequate capitalization on hand to
cover any "foreseeable" business debts.
Shareholder Liability for Corporate Debts. Where
corporate formalities are not observed, shareholders may be held
personally liable for corporate debts. thus, if a thinly
capitalized corporation is created, funds are commingled with
employees and officers, stock is never issued, meetings are
never held, or other corporate formalities required by your
state of incorporation are not followed, a court or the IRS may
"pierce the corporate veil" and hold the shareholders personally
liable for corporate debts.
Avoiding Double Taxation. Generally, the
corporation is taxed for its own profits; then, any profits paid
out in the form of dividends are taxed again to the recipient as
dividend income and the individual shareholder's tax rate.
However, most small corporations rarely pay dividends. Rather,
owner-employees are paid salaries and fringe benefits that are
deductible to the corporation. The result is that only the
employee-owners end up paying any income taxes on this business
income and double taxation rarely occurs.
NOTE: See "The S-Corporation" below as a popular taxing
alternative for corporations.
Duration of a Corporation. As a separate legal
entity, a corporation is capable of continuing indefinitely. Its
existence is not affected by death or incapacity of its
shareholders, officers, or directors or by transfer of its
shares from one person to another.
The S-Corporation
An S Corporation begins its existence as a "C-Corporation"
(discussed above) -- (i.e. as a general, for-profit corporation
upon filing the Articles of Incorporation with the appropriate
STATE office. However, after the corporation has been formed, it
may elect "S Corporation Status" by submitting IRS form 2553 to
the Internal Revenue Service (in some cases a state filing is
required as well).
Once this filing is complete, the corporation is taxed like a
partnership or sole proprietorship rather than as a separate
entity. Thus, the income is "passed-through" to the shareholders
for purposes of computing tax liability. Therefore, a
shareholder's individual tax returns will report the income or
loss generated by an S corporation.
Qualifying for S Corporation Status. To qualify
as an S corporation, a corporation must timely file IRS Form
2553 with the IRS. This election must be made by March 15 of the
current year if the corporation is a calendar-year taxpayer in
order for the election to take effect for the current tax year.
However, a "New" corporation may make the filing at anytime
during its tax year so long as the filing is made no later than
75 days after the corporation has began conducting business as a
corporation, acquired assets, or has issued stock to
shareholders (whichever is earlier).
To qualify for S corporation status, the corporation must:
-
Be filed in one of the 50
United States.
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Maintain only one class of
stock.
-
Maintain a maximum of 75
shareholders.
-
Be comprised SOLELY of
shareholders who are individuals, estates or certain qualified
trusts, who consent in writing to the S corporation election.
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NOT have a shareholder who
is a non-resident alien.
Losing S-Corporation
Status. Failure to observe ANY of the above
requirements could revoke S-Corporation status at any time. An
S-Corporation that loses its status as such may not re-elect
S-Corporation status for a minimum of five years.
Corporate Formalities. An S-Corporation follows
the same state formalities as does a C-corporation (i.e. filing
Articles of Incorporation and paying state fees).
IRS Filings. The S-Corporation must complete and
file IRS Form 1120s to report its annual income to the IRS each
year.
General Shareholder Requirements. ALL
shareholders of the corporation must be U.S. Citizens or have
U.S. Residency Status. If, for any reason, shares are somehow
sold or transferred (even if by will, divorce, or other means)
to a shareholder who is a foreign national, the corporation will
lose its S-Corporation status and be treated as a C-Corporation.
Who Should Elect S-Corporation Status? Owners who
want the limited liability of a corporation and the
"pass-through" tax-treatment of a partnership will often make
the S-Corporation election. In most cases, corporations that
would benefit from S-Corporation status are those who plan on
distributing the majority of earnings to its shareholders in the
year those earnings are realized.
Corporations who plan on retaining earnings for future
investments in future tax years often choose the C-Corporation
because, under the S-Corporation, earnings will be taxed as if
they were distributed to shareholders regardless of whether a
distribution actually occurred or whether the corporation
retained the earnings for future investment.
The Limited
Liability Company
Rules governing the Limited Liability Company (L.L.C.) are
usually distinct from the rules and laws governing corporations.
In general, however, the L.L.C. is a state-created entity
intended to provide it's members / owners with the limited
liability afforded to corporate shareholders while minimizing
many of the formalities corporations are required to observe.
If you are considering forming an L.L.C., you should be aware of
the following facts:
IRS Treatment of the Two-Member LLC. If your LLC
has two or more owners, The IRS will tax the LLC owners as if
the owners were members of a partnership. A partnership files
Form 1065 (U.S. Partnership Return of Income).
IRS Treatment of the One-Member LLC. An LLC with
only one member / owner is taxed by the IRS as a sole
proprietorship is taxed. Thus, the sole member of an LLC will
file (Form 1040), (U.S. Individual Income Tax Return) and will
include (Form 1040, SCHEDULE C) (Profit or Loss from Business)
with his/her tax returns.
"Tax My LLC as a Corporation!" Regardless of how
many members the LLC has, the LLC may file an Election to be
Treated as a Corporation for Purposes of Taxation (IRS Form
8832). If an election is made to be treated as a corporation,
the LLC must file Form 1120 (U.S. Corporation Income Tax
Return). IRS Form 1120, Form 1120 Instructions
Minimum Members Required by State Law.
Traditionally, most states have required that an LLC consist of
two or more members (owners). Recently, however, the majority of
states are allowing single-member LLCs.
Separate Legal Entity Status. Similar to the
corporation, an LLC is recognized as a separate legal entity
from its "members." Thus, an LLC can own property, commit itself
to contractual obligations, and even commit crimes.
Limited Liability for Members (owners). In most
cases, only the LLC is responsible for the company's debts thus
shielding its members from personal liability. However, there
are some exceptions where individual members may be held liable:
-
Guarantor Liability.
Where an LLC member has personally guaranteed the
obligations of the LLC, he or she will be liable. For example,
where an LLC is relatively new and has no credit history, a
prospective landlord about to lease office space to the LLC
will most likely require a personal guarantee from the LLC
members before executing such a lease.
-
Alter Ego Liability.
Where an LLC member has personally guaranteed the
obligations of the LLC, he or she will be liable. For example,
where an LLC is relatively new and has no credit history, a
prospective landlord about to lease office space to the LLC
will most likely require a personal guarantee from the LLC
members before executing such a lease.
Fewer Formalities than
the Corporation. Although a corporation's failure to
hold shareholder or director meetings may subject the
corporation to alter ego liability, this is not the case for
LLCs in most states. An LLC's failure to hold meetings of
members or managers is not usually considered grounds for
imposing the alter ego doctrine where the LLC's Articles of
Organization or Operating Agreement do not expressly require
such meetings.
Shared Management and Control. Management and
control of an LLC is vested with its members unless the articles
of organization provide otherwise.
Voting Interest According to Ownership.
Ordinarily, voting interest directly corresponds to interest in
profits which directly corresponds to share of ownership unless
the articles of organization or operating agreement provide
otherwise.
Transfer Requires Majority Consent. No one can
become a member of an LLC (either by transfer of an existing
membership or the issuance of a new one) without the consent of
members having a majority in interest (excluding the person
acquiring the membership interest) unless the articles of
organization provide otherwise.
Perpetual Duration. Traditionally, most states
did not allow an LLC to have a perpetual existence; LLCs were
traditionally required to specify the date on which the LLC's
existence would terminate. Today, however, most states allow a
perpetual duration for an LLC if stated in its articles of
organization.
Dissolution Upon Certain Events. Unless
otherwise provided in the articles of organization or a written
operating agreement, an LLC is dissolved at the death,
withdrawal, resignation, expulsion, or bankruptcy of a member
(unless within 90 days a majority in both the profits and
capital interests vote to continue the LLC).
Operating Agreement Required. To validly
complete the formation of the LLC, members must enter into an
Operating Agreement. This Operating Agreement may come into
existence either before or after the filing of the Articles of
Organization and depending on your particular state's laws, may
be either oral or in writing.
Different Laws in Different States. While laws
governing corporations have grown to be quite uniform amongst
the different states over time, LLC statutes can vary quite
drastically from state to state. This is most likely due to the
fact that the LLC is a VERY new form of business structure only
recently recognized by most governments (e.g. Hawaii only
recently began recognizing the LLC as a legitimate form of
business in 1997.
Written by Joseph Mandelbaum, EA, CFP, Chief Executive
Officer, RealTax, Inc.
Phone: 310-545-5400 Email: jmandelbaum@realtax.com http://www.Realtax.com
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