Setting Up The Company - First Development
Real Estate Investment Professionals
If you have read the previous posts, you will see that we learned one of our lessons we shared the hard way. We were not ready to do business immediately. Although we had hired an architect and were buying our land, we didn’t have a lot of things in place that we should have by now. At this point in time, we still needed to:
- Set up a company. LLC or S Corp?
- Find an accountant.
- Select a lawyer
- Set up a bank account
- Establish an accounting system
- Obtain insurance
If you are going to succeed in real estate investment or development, you need to assemble a good team of smart professionals. It will cost you some money upfront, but the value of their advice and mentoring will far exceed your costs.
We needed to immediately select an accountant to give us guidance on what type of corporate structure to establish. When you are selecting professionals, you want people who are smart and experienced. The only way to find them is to ask around and get recommendations from others in the business. You will quickly find two or three names that continually pop up. Interview those people and select the person that you feel comfortable with doing business.
Real Estate Investment Tax Issues
There are a lot of tax implications in the real estate development and investment business. I will review a couple here, but this is to just give you a better idea of why you need to get good, professional advice. Everyone’s situation is different.
The first is whether to organize as an S Corporation or LLC. Since both provide protection to your personal assets, this is mainly a decision around tax implications. There are two significant differences between the S Corporation and LLC:
First, the assets of an LLC can be distributed to its members without incurring taxable consequences. This is not true of an S Corporation. For example suppose two partners form an LLC and later purchase 4 separate properties. The partners could split up these properties at a later date, giving two to one person and two to the other without incurring a tax liability. With an S Corporation when the assets were divided, the properties would be treated as if they had been sold at Fair Market Value triggering potentially significant taxes if the properties had appreciated greatly.
Second, one of the advantages of an S Corporation is the ability to distinguish between wage earning income (which is subject to withholding tax) and income which is derived as a return on investment (which is not subject to withholding tax). With an LLC, all returns are treated as wage earning income and subject to the withholding tax.
There are numerous other differences ranging from the number of people allowed to participate in an investment to the flexibility of distributions. Again, you really need to consult with a professional.
S Corporation Versus LLC
The advice our tax accountant gave us for this particular development was to establish a S Corporation. We used the same process to hire an attorney and the entire corporation set up cost us $1,089.00 for our accountant and attorney’s work. Once the corporation was established, we set up our corporate bank account with each of us putting in $5,000 of equity for 50% of the corporation’s stock. Hint - don’t even consider setting up your bank account with anyone other than the bank that is giving you the loan.
We purchased Quickbooks, met with our accountant to set up the chart of accounts and we were underway with our accounting system. If you don’t know anything about accounting, learn it. Real estate investment and development is all about the numbers. If you don’t know how the numbers work, you are heading for trouble.
