Thanks to one of Smokey's friends, we have a useful tool for all of you investor types.
"Hi Smokey - You have a great blog and I appreciate your focus on Canadian real estate and our market. Here is a tool that I use to calculate land transfer taxes when closing deals for my clients.
Canadian real estate calculator
All the best from Toronto, Kelly"
Tuesday, November 22, 2005
Monday, November 21, 2005
A Realtor has questions - we have answers
The IRS does not tax businesses according to the type of legal entity used. There is no difference between an LLC (Company) and a Corporation – from the IRS’s point of view. What the IRS cares about is the tax selection that made.
- A corporation can have 2 tax selections. Chapter “C” of the tax code or sub-chapter “S” of the tax code.
- A company can have 3 tax selections. Default (single or multi-member flow-through); chapter “C” of the tax code or sub-chapter “S” of the tax code.
In most states the costs of formation / on-going registration of a corporation or a company are the same. In those states where the costs are different, we recommend the less expensive. Unless you are planning on “going public”, issuing shares on the stock exchange, or having lots (several dozen) of employees, a corporation has more on-going paperwork than a company. How much more? About one third.
Case law to-date shows that the courts apply the law to an LLC the same way that a corporation of the same tax selection is treated.
Since there appear to be no significant legal differences between a company and a corporation (at least as far as small business owners are concerned), we recommend the simpler and less expensive entity with the appropriate tax selection for any given situation.
If, on the other hand, you want INC. as opposed to LLC at the end of your business name, then a corporation is the only way to go.
~~
Q. Doesn't all the income from a one-member LLC dump back to where it would be on a personal tax return - Schedule C with all the same self employment tax?
A. A single member LLC with the default tax selection does show up on your personal tax return to be taxed as active (self-employment + income tax) or passive (income tax only) depending on how the income is classified.
A company or a corporation with a sub-chapter “S” tax selection affords you the possibility of reducing your active income (and the resulting employment tax). The exact ratio of active income / passive distribution is something that your CPA would help you determine. Many times this reduction is as much as 50%. Your savings on this alone would be 15.3% on the amount treated as a distribution. In addition, your CPA should help you take advantage of the additional deductions that sub-chapter “S” provides to lower your taxable income even further.
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Q. Does the LLC relieve the licensee of liability or responsibility of the licensee for conduct or licensable activities as misconceived by many people?
A. As a Realtor® we are liable for our actions whether we are in an entity (company or corporation) or not. That’s what E&O insurance is for – unless you commit fraud or other illegal activity, in which case it doesn’t matter whether you’re an employee, owner or a professional. A corporation or a company does not provide shelter from the consequences of an illegal act. In addition, the regulatory body overseeing Realtors® at the state level also has compliance requirements e.g. Nevada requires that the agent’s name is used as the business name; California does not require the agent’s name to be used unless they are acting as a broker.
~~
As an entity formation provider, we charge the same fees whether the entity is a Partnership, Limited Liability Company or a Corporation, and whether the tax selection is defaulted or if chapter “C” or sub-chapter “S” tax treatment is chosen.
As an entity structuring provider, we provide information on the possibilities of using different combinations of entities and tax selection to achieve your wealth accumulation and liability reduction goals.
As an entity education provider, we encourage people to learn as much as possible about the consequences of their choices and how to “do the paperwork” to take advantage of their choices through our weekly and monthly teleseminar series and through reading, coaching and open discussions.
Got to go - mom says that I have an appointment - wonder what she means?
Smokey
Thursday, November 10, 2005
Where should I set up my company?
"I live in California, but I'd rather not pay the taxes or the cost of doing business here." How many times do I hear that every day?
There are 2 things to consider here.
One is where is your nexus of operation.
The other is what would you pay tax on.
An S corporation or an S company is a flow through entity: all income flows down to you as W2 or distribution, so you will pay taxes on all the income in CA regardless of where you earn it.
That is because you are a CA resident, and CA reserves the right to tax residents on all income they make worldwide. If you can make a case that your nexus of operation is all over the US, you can incorporate anywhere, but you will still be taxed on all the income in CA anyway.
If you have a partner in the company who is earning outside CA, we need to talk.
A C corporation or a C company is different. And for a C it makes a lot of difference where you put it. In the C, you will still be taxed in CA on W2 income, but the company itself will pay its own taxes on profits in whatever state it is incorporated in. Big difference.
pssst - the only practical way to minimize your state taxes is to change states.
There are 2 things to consider here.
One is where is your nexus of operation.
The other is what would you pay tax on.
An S corporation or an S company is a flow through entity: all income flows down to you as W2 or distribution, so you will pay taxes on all the income in CA regardless of where you earn it.
That is because you are a CA resident, and CA reserves the right to tax residents on all income they make worldwide. If you can make a case that your nexus of operation is all over the US, you can incorporate anywhere, but you will still be taxed on all the income in CA anyway.
If you have a partner in the company who is earning outside CA, we need to talk.
A C corporation or a C company is different. And for a C it makes a lot of difference where you put it. In the C, you will still be taxed in CA on W2 income, but the company itself will pay its own taxes on profits in whatever state it is incorporated in. Big difference.
pssst - the only practical way to minimize your state taxes is to change states.
How many &!%$#*^%$ LLCs do I need anyway?
There are many ways to do anything - it just depends on what makes sense.
For Real Estate you could hold all properties in a single LLC. You would then register that LLC in each state where you have property. If a tenant sues you, they will sue the LLC that holds title to the property.
The LLC will need to defend the suit in the state where the lawsuit was brought - the state where the property is - and should be registered in that state.
You register the LLC either by forming it in the state or doing a foreign registration if it was initially formed elsewhere. I have heard an attorney suggest that you not do a foreign registration until you are sued; but if your property is in a state that takes 6 weeks to do a foreign registration even when expedited, like AZ, that's a problem.
Here's where sense comes in. You would not want to put all your property into one LLC because in the case of a lawsuit, ALL property in the LLC is at risk.
Think of the LLC as a basket. If a suit is brought against the basket, everything in it could fall to the plaintiff to settle the judgment if you lose. And in any case, all of those assets (and their revenue) gets tied up until the case is resolved.
So you need to decide how much equity you are willing to risk in a single LLC. If you are planning to buy multiple properties in a single state, the best approach usually is to set up an LLC in that state.
If you are buying one property in each of 3 states, you can form an LLC in one of the states and do foreign registrations of the LLC in the other 2. Since a state typically charges more for foreign registration than for an entity set up in the state, and you still need a resident agent in each state, this is not necessarily a good strategy for saving money.
If you plan on being wealthy, better adjust your investing tactics accordingly.
Bye for now.
Smokey
For Real Estate you could hold all properties in a single LLC. You would then register that LLC in each state where you have property. If a tenant sues you, they will sue the LLC that holds title to the property.
The LLC will need to defend the suit in the state where the lawsuit was brought - the state where the property is - and should be registered in that state.
You register the LLC either by forming it in the state or doing a foreign registration if it was initially formed elsewhere. I have heard an attorney suggest that you not do a foreign registration until you are sued; but if your property is in a state that takes 6 weeks to do a foreign registration even when expedited, like AZ, that's a problem.
Here's where sense comes in. You would not want to put all your property into one LLC because in the case of a lawsuit, ALL property in the LLC is at risk.
Think of the LLC as a basket. If a suit is brought against the basket, everything in it could fall to the plaintiff to settle the judgment if you lose. And in any case, all of those assets (and their revenue) gets tied up until the case is resolved.
So you need to decide how much equity you are willing to risk in a single LLC. If you are planning to buy multiple properties in a single state, the best approach usually is to set up an LLC in that state.
If you are buying one property in each of 3 states, you can form an LLC in one of the states and do foreign registrations of the LLC in the other 2. Since a state typically charges more for foreign registration than for an entity set up in the state, and you still need a resident agent in each state, this is not necessarily a good strategy for saving money.
If you plan on being wealthy, better adjust your investing tactics accordingly.
Bye for now.
Smokey
What's a Tenant in Common? Some kind of shared renter?
How should I hold my property?
When you buy a property in your own name (the only way I've found to get a loan) then the next step is to have the title (or deed) transferred from your name into the name of an entity (usually a Limited Liability Company). Of course when you do transfer the property, one of the questions that comes up is HOW to hold it! You have several choices, and they all result in different consequences. So, what are your choices?
- Tenants in Common (TIC)
- Joint Tenants with Right of Survivorship
- Community Property Estate
- Community Property with Right of Survivorship
Each of these terms has a specific implication. You need to decide which one fits your purpose (and is allowed by state law).
Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, as well as Puerto Rico use the community property system. These jurisdictions hold that each spouse shares equally the income earned and property acquired during a marriage.
In the other states, spouses generally share property under one of the following three forms of co-ownership:
- Joint tenancy is a form of ownership that exists when two or more people own property that includes a right of survivorship. Each person has the right to possess the property. If one partner dies, the survivor becomes the sole owner. Any two people--not just spouses--may own property as joint tenants. A creditor may claim the debtors interest in joint tenancy property.
- Tenancy by the entirety allowed only in some states, tenancy by the entirety is a type of co-ownership of property by a husband and wife. Like joint tenancy, it includes a right of survivorship. But a creditor of one spouse may not attach (seize) the property. Each party usually must consent to the sale of the property. Divorce may result in a division of the property.
- Tenancy in common is a form of co-ownership gives each person control over his or her share of the property, and the shares need not be equal. The law does not limit tenancy in common to spouses. A tenancy in common has no right of survivorship; when one spouse dies, his or her share passes to the heirs, either by will or state laws.
Tenancy rules vary from one state to another. Some tenancies are complex and must be created in a precise manner; otherwise the courts may not enforce them.
Confused yet? When in doubt, talk to your estate and legal experts on your team.
As for me, I see someone opening a can of ... Tuna!
Got to run.
Smokey
Wednesday, November 02, 2005
Why Blog?
Some visitors have been curious about the blogging, so Smokey pulled some comments various sources to help explain the phenomenon.
From Wikipedia...
A weblog or blog is a web-based publication consisting primarily of periodic articles (normally, but not always, in reverse chronological order). Although most early blogs were manually updated, tools to facilitate the updating and maintenance of such sites made them accessible to a much larger and less technical population. The use of some sort of browser-based software is now a typical aspect of "blogging."
Blogs range in scope from the diaries of individuals to webpages run by political campaigns, media programs, and corporations. They range in scale from the writings of one occasional author (known as a blogger), to the collaboration of a large community of writers. Many weblogs enable visitors to leave public comments, which can lead to a community of readers centered around the blog; others are non-interactive. The totality of weblogs or blog-related websites is often called the blogosphere. When a large amount of activity, information and opinion erupts around a particular subject or controversy in the blogosphere, it is sometimes called a blogstorm or blog swarm.
The tools for editing, organizing, and publishing weblogs are variously referred to as "content management systems," "publishing platforms," "weblog software," and simply "blogware."
Blogs differ from forums or newsgroups in that only one person or group can create new subjects for discussion on their blog. A network of blogs can act similarly to a single forum in that each individual entity in the blog network creates subjects of their choosing for others to discuss; these different subjects are presented in a thread-like format on a meta-forum with no one single poster having any greater control over the content of the thread than any other. Such networks require substantial interlinking to pull off, and so a group blog with multiple people holding posting rights is more common. Because they "go first," blog owners often has control over how a subject is discussed on their blog due to their ability to frame the issue.
This Google-based tool - Blogger - has several key attributes that appeal to me.
From Wikipedia...
A weblog or blog is a web-based publication consisting primarily of periodic articles (normally, but not always, in reverse chronological order). Although most early blogs were manually updated, tools to facilitate the updating and maintenance of such sites made them accessible to a much larger and less technical population. The use of some sort of browser-based software is now a typical aspect of "blogging."
Blogs range in scope from the diaries of individuals to webpages run by political campaigns, media programs, and corporations. They range in scale from the writings of one occasional author (known as a blogger), to the collaboration of a large community of writers. Many weblogs enable visitors to leave public comments, which can lead to a community of readers centered around the blog; others are non-interactive. The totality of weblogs or blog-related websites is often called the blogosphere. When a large amount of activity, information and opinion erupts around a particular subject or controversy in the blogosphere, it is sometimes called a blogstorm or blog swarm.
The tools for editing, organizing, and publishing weblogs are variously referred to as "content management systems," "publishing platforms," "weblog software," and simply "blogware."
Blogs differ from forums or newsgroups in that only one person or group can create new subjects for discussion on their blog. A network of blogs can act similarly to a single forum in that each individual entity in the blog network creates subjects of their choosing for others to discuss; these different subjects are presented in a thread-like format on a meta-forum with no one single poster having any greater control over the content of the thread than any other. Such networks require substantial interlinking to pull off, and so a group blog with multiple people holding posting rights is more common. Because they "go first," blog owners often has control over how a subject is discussed on their blog due to their ability to frame the issue.
This Google-based tool - Blogger - has several key attributes that appeal to me.
- Inexpensive (free is good!)
- Easy to use
- Somewhat customizable (see easy to use)
Our focus supports many of the issues that our clients at Your Entity Solution, LLC have raised during the intake session as well as on-going discussions. By keeping the focus narrow, we are more likely to be interesting to the same type of readers, and more likely to have them come back.
Setting up a Blog is fairly simple - finding specific topics and content for the focus of the blog is the hard part.
Smokey has got to go now, it's off to the vet for her shots.
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