You are finally biting the bullet and jumping into real estate investing! You found the right property; you are going to flip it or hold it for rental or develop its use to a better potential.
The question is: Will you be legally protected from now until when you flip it? When renting housing are you protected from the actions of your tenants and their guests? Are you protected by the property development from partners, investors, construction workers, or even the eventual buyers?
A limited Liability Company [https://www.investopedia.com/terms/l/llc.asp] (LLC) and a Realty Trust are two of the most common options available for protection against some of the risks. Which should you use?
An LLC is a business entity you can operate solely or with others. You don’t have to hire any employees. You don’t need a board of directors that is required with corporations. When it comes to legal disputes, the LLC separates the business assets (your real estate properties) from your personal assets. This separation of assets keeps the LLC property ‘boxed’ in its own ‘box’ so that if it runs into financial trouble your personal bank accounts, your home, and other assets cannot be taken to pay the debts.
Although the LLC operates on its own, you must comply with high standards to ensure that you are using the LLC as a business, separate from intermingling the cashflow or assets as personal use. It cannot be used as a place to simply hold your personal assets. It needs to file its own tax returns, hold annual meetings, and be operated under the strict guidelines of the State government, otherwise your personal assets will be available for plundering.
Trusts that are used to hold title to real estate are known in the general sense as realty trusts. They may follow a format such as the ‘Illinois Land Trust’ or may be a ‘Nominee Trust’ depending on the State where the property is located or where the trust was formed. A realty trust can be formed quickly allowing you to set one up and begin using it within hours. Often I explain to people that I can print one off my computer, get it notarized, go online to IRS and get a Tax ID number, and open a bank account – all within an hour of deciding on a name and use for the trust.
As with any trust, there are two basic types of trusts, choices of being ‘irrevocable’ (where the creator hands over permanent control of the assets of the trust to the beneficiaries), or revocable (where the creator remains in control of the assets and can make changes to the trust). Most realty trusts are revocable.
Many financial planners suggest the LLC for rental real estate. The problem is that using one LLC for all your real estate is very risky, and separate LLCs for each property is expensive, complicated, and unnecessary – especially when you should not re-use them after the sale of the asset.
The benefit of using a trust instead of an LLC is that a trust provides one or more extra layers of privacy because all the documentation from contracts, leases, and income tax filing are all in the name of the trust. The beneficiaries (owners) names are not publicly exposed. Additionally, Transfer of future ownership does not have to be recorded publicly. They are quick and easily set up and don’t require annual corporate filing fees.
Neither an LLC nor a Trust can cover you completely, however combinations of both and several layers of Trusts make it difficult for outsiders to find the ‘true’ owners. Any measures that you take using one or the other, or both is worth the time effort and money to protect your assets from those who would take your hard-earned assets.
Keep On Learning: With Your Successes, I’ll See You Over the Top,
– Alan David Kosinski, Real Estate Extraordinaire
For more information go to: https://alko-win.com/catalog/mm/ap/