Sue has just saved you a TON of work, expense, and liability exposure (TU Sue)!
Linda also brings up an extremely import topic which should have you thinking twice about incorporation, that being "Corporate Veil" protection. While incorporation can protect an individual from liability, there is a "Mythconception" that just incorporating protects you from liability. In fact, ALL that is required to lift the "Corporate Veil" is not acting in the proper manner for which a corporation should act (.i.e., annual shareholder meeting, keeping meeting minutes, taking significant action without prior approvals, following the bylaws, etc.). Do not underestimate the amount of time it takes to â€œdo it rightâ€.
http://www.businessdictionary.com/definition/corporate-veil.html defines the "Corporate Veil" as follows:
Legal concept that separates the personality of a corporation from the personalities of its stockholders (shareholders), and protects them from being personally liable for the firm's debts and other obligations. This protection, however, is not ironclad or impenetrable. Where a court determines that a firm's business was not conducted in accordance with the provisions of corporate-legislation (or that it was just a faÃ§ade for illegal activities) it may hold the stockholders personally liable for the firm's obligations under the legal concept of 'lifting (or piercing) the corporate veil.'
If you still want to investigate a LLC I would suggest a review of:
Personally, I would favor the wisdom of Sueâ€™s experience in the matter.
I wanted to purchase resl estate and have it set up as a separate business entity. My objective was to secure wealth so it was not a target for frivolous lawsuts, allowed proper succession to my beneficiaries on my passing, and gave general control outside of my personal assets, thorugh a defined plan.
The challenge is that the federal laws relating to S corporations and LLC's do not coincide with CA laws relating to thoee structures. What my corporate attorney established was contrary to what the CPA said should be set up. The simplest solution was to have properties purchased under my own name, securing an umbrella insurance policy. I could then move them in to a family living trust. (Call Ed Cook, CPA at (916) 705-4958.) My original structure was properties owned by an LLC, that was owned b a family limited partnership, that was owned by my personal trust. It needed to be maintained, which was costly, and totally confusing....but that's what my 'wise' attorney set up.
In all cases you need to finance under your personal name, or even as a corporate structure, give personal guarantees anyway.... talk to a CPA like Ed first. Make sure you understand your objectives, and go the simplest route. Setting up an umbella insurance policy under your own name might be easiest and least expensive. It's what many active investors do.
Your comment, "ALL that is required to lift the "Corporate Veil" is not acting in the proper manner for which a corporation should act (.i.e., annual shareholder meeting, keeping meeting minutes, taking significant action without prior approvals, following the bylaws, etc.). Do not underestimate the amount of time it takes to â€œdo it rightâ€. ... is right on target. Thanks for elaborating. This is very true and something worth taking into consideration.
Peter, I have run into several people that believe by attaching a title at the end of the name, protects them and splits their personal liability from their business liability. Steve made some excellent points and I truly hope that before moving forward, you will do your homework.
She is from CA and could probably give you some good information.
One point I forgot to mention is that if you do decide to go for Sub Chapter S, it is EXTREMELY IMPORTANT THAT YOU NEVER, EVER, EVER co-mingle funds. In doing so, you would create a situation called piercing the corporate veil. Basically, if you find yourself in a law suit and the plaintiff can prove that you mix used those funds (such as writing a check from corporate for personal expenses and visa versa), you could lose the protection of the corporation.
You really need to do some research for your particular state and make sure that you are getting advice from a qualified attorney and/or accountant.
I am not an attorney and this information should not be construed as legal advice or opinion.
I agree with Lynn. You need to meet with a good real estate or corporate attorney. Partnership, LLC or Sub Chapter S are probably all the entities you should consider. With the help of your attorney and your accountant, they will be able to best assess future ramifications of your decision.
Right now any type of investment property is risky business and very difficult to get financed. It is starting to lighten up a bit, but only a bit.
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors