Investors typically have lots of questions regarding the compliance side of entity structuring. There are many things to consider such as states to register, tax filings, and what a properly set up business looks like. In this article, we will examine all the different aspects of compliance when structuring an entity for your real estate investments.
Ease of Compliance
Where to incorporate
Choosing where to incorporate your entity is important because the state of incorporation will be the company’s legal home. Most states don’t require a business to maintain an office within the state; a company can operate a business in another state. The most common choices of states to incorporate are state of operation, Delaware, or Nevada.
The State Where You Operate – My Choice
Incorporating in the state of operation is the least complicated and least costly choice. In addition, if you were to get sued, the local laws will govern. So your entity should have legal standing in the state where you intend to operate your business.
Delaware
Delaware is very popular as an incorporation state with thousands of start-up companies in the US. Delaware has low incorporation fees, low taxes, and management flexibility making it an attractive option.
Nevada
Again, Nevada is attractive to new companies because of its favorable corporate laws such as low taxes, low fees, and corporate privacy laws. But, like Delaware, it is larger corporations that have the most to gain from incorporating in Nevada. Similar to Delaware, smaller corporations may find more disadvantages than benefits to incorporating in Nevada.
The Name of the company
Corporate names must be followed by the word “Corporation,” “Incorporated,” or “Company.” An LLC name must be followed by the words “Limited Liability Company,” or “Limited.” An abbreviation of the corporate indication, such as “Inc.,” “Co.,” or “LLC” is also acceptable.
I have gotten a lot of questions about what type of name to choose. My advice is to go with a name that shows a benefit rather than features of your business. For example, “EasyRehabs, LLC” versus “Home Renovations, LLC”.
I also recommend the use of a trading name in some instances. A trade name is a name a business uses to identify itself. A trade name can be different from the legal name the business has been registered as, for corporate status. For example, a business might be incorporated as “XYZ Holdings” and do business under the trade name “Alphabet Productions, Inc.”
A trade name may be registered with the county where the business is located, as a “fictitious name” or d/b/a (doing business as) name. A trade name may or may not be trademarked. Trade names are also Known As fictitious names, trademarks, d/b/a. For example, The company was incorporated as ABC Holdings, but it used the trade name “Easy Rehabs” for its rehabbing company.
You can have several trade names under one legal entity
The address of the company’s initial office
Only an actual physical address is accepted for The Articles of Incorporation, no PO Boxes are allowed. I usually recommend that investors and business owners stay away from using their home addresses for legal reasons. You can register with companies that will allow you to use their business address and they actually assign you a suite number rather than a p.o. box.
The name/address of the Resident Agent
The resident agent receives important legal documents on behalf of the corporation. The resident agent’s address must be a physical address (not a PO Box) within the state of incorporation. Again, I also recommend that you do not use yourself as the registered agent. Many companies such as ours can offer resident agent services for as low as $75/year.
For Corporations: Authorization of shares to issue
The corporation can issue a number of shares (authorized shares). The Board of Directors decides if and when to issue shares. It is advisable for the company to authorize more shares than it plans to issue to allow more company flexibility further financing is required.
For LLCs: The management type of the LLC – Member Managed/Manager Managed
An LLC can either be Manager-managed or Member-managed. If an LLC is Manager-managed, a Board of Managers takes control of the power and authority. If an LLC is Member-managed, there is no Board of Managers, and the LLC is directly managed by its Members (the owners).
Member names and addresses
In an LLC, the “Members” are the owners of the company. Some states require the names and addresses of all the initial Members.
Manager names and addresses
If the LLC is Manager-managed, the power, and authority of the company’s management lies within its Board of Managers, Some states require the names and addresses of all Managers
Entity Set up at Wealth Building CPA
Here’s a step-by-step description of the services we provide for Entity Structure at Wealth Building CPA:
Step 1 Once we receive the business registration forms we will get the articles or organization ready and submit them to the State Department of Assessment and Taxation (SDAT).
Step 2 Once we receive an acknowledgment from SDAT, we will
obtain an EIN number from the IRS.
Step 3. With the EIN number and acceptance of filing, you would open up a business bank account.
Step 4. An operating agreement will be drafted and reviewed with the Wealth Building CPA.
Step 5. Cash Sweep (All income and expenses incurred prior to the establishment of the bank account are moved onto the books of the business – if applicable). We will need a list of your business expenses to do this.
Step 6. The bookkeeping process will be discussed
Step 7. Yearly review and annual filings.
Here are a couple of recent questions from my blog on Entity Structure and Compliance...
Question: “A client came to me and asked why he did not get any stocks from an LLC. I told him that LLC does not issue stocks. He told me that he once went to an attorney to set up an LLC. He keeps insisting that the attorney told him he would have such and such amount of stocks in that LLC. Am I missing something?”
My Answer: You are missing what is commonly called “Units of Membership”,” Units of Ownership”, or “Membership Certificates”. They look like shares of corporate stock and result in basically the same as shares of corporate stock. I have made them in the past for a client with my PC.
Question: “I have never heard of these certificates for LLCs. Is this unique for certain states or just window dressing for clients who want something on paper? “
My Answer: It is window dressing. Just like “stock certificates”. How many small corporations do you know of actually have a piece of paper that designates the number of shares they own? Microsoft has a template you can look at HERE.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at Ultimate Wealth Building Plan
