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As most entrepreneurs know, there are a lot of little challenges to overcome when starting a new business.
If you're serious about taking the right steps from the outset, one of the first things you'll want to get squared away is the formation of your business entity.
Most of the real estate investors I know (including myself) own their properties in the name of an LLC (aka – Limited Liability Company) and there are a few reasons why:
- An LLC can protect your personal assets from business-related lawsuits.
- An LLC has tax advantages that allow for “pass-through taxation” (whereas some other types of corporations are double-taxed).
- An LLC offers instant credibility to many of your customers.
When I first tried to familiarize myself with the different types of legal business entities available and what each was designed to do, I got an excellent overview of them from this book. If you need an education in this area, this was a great resource that helped me put the pieces together (just be sure to ingest plenty of caffeine before you get started).
Disclaimer: This blog post can't tell you which legal entity is best for your business. I'm not a lawyer or accountant, and I don't know all the specifics of what you want to achieve with your business. The instructions I give are just one way to do things, but there are many other ways. Different types of businesses have different rules and tax implications, so it's important to talk to a lawyer before making any decisions.
How to Register Your LLC
Forming your corporation or LLC may sound like a complicated legal process, but it's quite simple, and you can do it in minutes.
With an online service like Northwest Registered Agent, you can avoid the mind-numbing minutiae of trying to find the right forms for your state, fill them out correctly, and send them to the right place. You can also do it for A LOT less money than an attorney would charge for the same service.
Of course, an attorney can technically give you the best advice and make sure everything is fine-tuned to fit your situation. Still, a service like Rocket Lawyer is probably your next best option if you're on a shoestring budget (like I was in the beginning).
As with anything, when it comes to incorporating your business, there is more than one way to skin a cat. I'm not saying you need to use a service like Northwest Registered Agent; it just happens to be a vehicle that makes the process easy and inexpensive. If this tutorial looks like something you can do – then feel free to give it a shot!
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Note: If you have the budget and want to hire an attorney to look at your specific information and ensure you're doing the right thing, Anderson Business Advisors can help.
Should You Form a Corporation or an LLC?
If you're not well-versed in corporate law, you might feel lost in all the legal jargon of incorporating your business.
That's okay – I felt the same way in the beginning. It's a bit intimidating when you aren't sure what kind of legal entity to form, how to do it, and the pros and cons of each option. Since I'm not an attorney, I'm in no position to tell you what to do, but I can tell you what I did and why.
When I started my real estate investing business, I registered a new LLC (Limited Liability Company) in the state where I was buying properties. There were several reasons why, but it mainly boiled down to this:
I was the sole owner of the company.
With no other owners involved, several aspects of my business have been simple by design since day one. With only one owner, it’s easier to sign documents, control the company, keep records, do my accounting, etc. It also allows me to avoid preparing a separate tax return for the business each year. I include a Schedule C with my personal tax return and call it good.
An LLC allows for “pass-through taxation.”
With an LLC, I only pay taxes once at the personal level, and it only applies to the net profit that flows through to me personally. I've found it to be a much simpler approach, and the fewer times I have to take a hit from taxes, the better.
There are other considerations too. Check out this video from MyCorporation (another service that can help you incorporate), which does a decent job of summing up a few of the biggest issues that are worth thinking about…
As you can see, it's not a bad idea to consult your accountant and/or attorney to decide which makes the most sense for your situation.
Where Should You Incorporate?
Another question is,
“What state should I register my Corporation or LLC in?”
It's a valid question because while most states have many similarities, none are exactly alike. Some states have different tax laws, filing fees, and other factors that can come into play.
It's also worth considering which state you'll be doing business in because, in many cases, it will make the most sense to have your business entity registered there. Here's another video that can help explain…
Again, since I'm not an attorney or an accountant, I'm in no position to advise you on what to do, but just speaking for myself, I chose to register my LLC in the state where I lived, which also happened to be the state where I was planning to do the bulk of my business.
Tax ID Number & Corporate Documents
Once your new business entity has been registered in the state of your choice, the next step is to get your Tax Identification Number (aka – Employer Identification Number or EIN). You can do it for free through this application form on the IRS website.
This video will show you step-by-step how it’s done.
If your business is a single-member LLC (like mine is), you can also use your social security number as your Tax Identification Number, but to keep this business entity thoroughly separated from your personal finances, it's not a bad idea to register for a separate EIN anyway.
If at any point you need to create an Operating Agreement for your LLC (note: this will probably be required the first time you close a deal with a title company or apply for a loan in the name of your business), this video explains one easy way to do it…
If you want to create your Operating Agreement through the method I explain above, you can get started right here.
Putting it All Together
As I mentioned earlier, creating a corporate entity isn't a requirement for getting started.
However, if you want to set up a serious business that will last for years and protect you from personal liability, I think it's important to set it up as a corporation or LLC. When you buy and sell properties under your personal name, you're essentially putting all of your personal assets at risk in the event of a lawsuit, and that's NOT a position you want to put yourself in voluntarily.
Given how easy it is to check this box, there's no reason to be intimidated. If you need help going through these motions, companies like Northwest Registered Agent will make it easy.