LLCs Are Not the Only Business Entity

30 Mar LLCs Are Not the Only Business Entity

Don’t be brainwashed, LLCs are not the only business entity you have to choose from. There are also C-Corporations, S-Corporations, Partnerships, Limited Partnerships, Family Limited Partnerships and Sole Proprietorship’s. However, LLCs are great for a lot of reasons.

The problem is that way too many new investors attend one of those this week only Guru workshops. At the workshop the Guru’s “TEAM” will attempt to sell you a $5,000 or $10,000 LLC “starter package”. Yes the correct term is “TEAM”. This is because most of the time the Guru phones it in or sends a video. The almost never show up at the recruiting and sales event being held.  The “TEAM” sells their overpriced LLC starter package using fear based marketing tactics. They preach it as the only way you can defend your property and protect your assets against an attempt to seize them in court.

Cost of An LLC

You can form an LLC by yourself. In the state of Illinois just fill out a form and pay the $150.00 filing fee. You can also pay more for express service.

You can and should hire an attorney.  S qualified attorney will set one up for anywhere from $150.00 to $900.00 plus the filing fee.

My Opinion

Personally, I like the LLC as an asset protection tool. It just isn’t my only one. Since it is a hybrid of recent arrival it has some unique asset protection like a corporation. A corporation has the “Corporate Veil”. Maintain the corporate proprieties and your corporation will protect you and your assets as long as no criminal action is involved. Or you get a judge on a bad day.

LLC’s also provide “Charging Order Protection” and are similar to a partnership agreement. How this works and the extent of protection varies from state to state. Who knows if it will still be there in Illinois next year, but it should be. What this means is that the LLC is protected from your errors not committed when conducting LLC business.

So the Corporate Veil protects you and your assetts not part of the corporation and the charging order protects the assetts of the corporation. Kind of a double whammy when it works. Hire a lawyer to explain this in more detail.

What happens before a Lawsuit

First the plaintiff attorney looks up the address where the incident occurred at the county court house. They will use this information to figure out who to file a lawsuit or threatening letter to.

Next a smart plaintiff attorney will do their research about your business entity before jumping in head first. In Illinois they will go the the Secretary of State’s website and look up your LLC. On the site they will find the name and mailing address of the Registered Agent.

A stand alone land trust defeats this at step one. Now there are other steps that can be taken by any plaintiff attorney, They might realize that a land trust could indicate a savvy investor. This might lead them to search for more properties. There is no one size fits all magic pill.

Series LLC Warning

If you were conned into opening a series LLC the plaintiff’s attorney will determine how many LLCs make up the series. This gives them a rough idea of how many properties you own. Fifteen (15) buckets in the series equals a minimum of fifteen (15) properties to go after. Why would anyone in their right mind make it that simple to get taken to court.

Using multiple land trusts with different names makes this much more difficult.

Contingent Fee or Up Front Retainer

After determining if you have assets worth pursing the plaintiff attorney now has enough information to consider taking the plaintiff’s case. If you look suit proof they will probably ask the plaintiff for an up front non refundable retainer. If you look like a 15 bucket LLC they may reduce the retainer or take the case on a contingency basis.

There is one exception to this, “Land of Lincoln Legal Assistance Foundation, Inc.” They will take most tenant verses landlord cases without a retainer.

If you were using a stand alone land trust this would provide a great deal of privacy and possibly defeat this.

Illinois LLC in Another State

If you are based in Illinois then you classified as a Domestic LLC. The next state will treat your Illinois LLC  as a foreign business entity.  When that happens you have a few duties.

1. File appropriate articles with the Secretary of State where the new property is located. Declaring your LLC as a foreign entity and paying the associated start up and annual fees. This will cost you just about as much as establishing a local LLC.

2. Find and hire a registered agent in your new state. This will be the case even if you establish a local LLC

3. Your LLC will need to file an additional state income tax return in the new state

4. Your LLC liability insurance will need to be endorsed for the additional state(s) at the new fees. Your business liability insurance is in addition to the property liability insurance

5. Failure to properly insure your LLC can result in the LLC being bypassed in a lawsuit. In corporations this is known as piercing the corporate veil.

6. Get proper legal counsel on doing all of this.

7. Series LLC’s give plaintiff attorneys a place to figure out how many properties you own.

CHOOSE A BUSINESS ENTITY

You can choose any business entity you want. Sole proprietorship, a form of partnership, LLC, S-Corp or C Corp. The business entity is what deals with the public. Always get competent legal advice when setting up your business entity,

LegalShield is Affordable

If you do not have an affordable attorney contact me about LegalShield. You can also  go to www.skidis.Biz and read more and sign up online. The standard plan with business rider and expanded defense costs is less than $540 a year or just under $45.00 a month. Not bad for business hours legal consultation on unlimited topics AND 24/7 emergency access.

Tax Treatment

When it comes to tax treatment, LLCs are not the only business entity you have to choose from. Under the new Tax Cuts and Jobs Act (TCJA) also referred to as the “Trump Tax Cuts” an S – Corporation is receiving the best tax treatment. Let’s repeat that! The S-Corporation is now receiving the best income tax treatment there is. BONUS NUGGETT: An LLC can be taxed as an S-Corporation!

My other corporation prepares income tax returns for our clients. Many of them are real estate investors.  I am a Registered Income Tax Preparer with the IRS. Right now the S-Corp is the new tax saving vehicle.

LLCs can be taxed as sole proprietorships, partnerships, S-Corporations or C-Corporations. They can even be treated as a disregarded entity on your personal income tax return. If you choose soemthing besides a disregarded entity make sure to notify the IRS within the correct time frame. Also, anything other than disregarded entity status should file their tax return by March 15th of each year. The penalty for late filing is $195.00 per month per partner in the LLC.

Conclusion

The gurus are still selling overpriced LLC’s because they have established a fear based demand for the product. LLCs are not the only business entity you have to choose from. Consider the S – Corporation or being taxed like one

You need to protect two individuals. Yourself and any one that may be injured by your negligence.

Sound business practices, proper maintenance and safety inspections can protect the public from many problems that could arise. Do all within your power to prevent an accident from occurring.

To protect yourself consider using land trusts, having a properly set up business entity and plenty of insurance.

In addition to insuring the property you should consider obtaining liability insurance starting at One Million Dollars per property. Then get a commercial liability umbrella for another million or so. Make sure your business entity is insured as well.

Are you interested in attending our Fall Land Trust Conference. Send an e-mail to [email protected] for details.

DISCLAIMER

The author is not an attorney and not attempting to practice law or give any legal advice. The author is rendering an opinion.  Always consult a qualified attorney before implementing an asset protection strategy

Good Luck and Good Investing

George N. Skidis, Jr.

President, Illinois Real Estate Investors Association, Inc.