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Tax and liability shelter come with an LLC


Dear Steve,
I am looking at buying some commercial property to rent. What is the best way to set it up to protect me from liability and from taxes before I buy? -- Guy D'Mi

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Dear Guy,
It's a pretty safe bet that your best move is to form a Limited Liability Company, which is basically a hybrid between a corporation and a partnership.

LLCs are quite popular among real estate investors for good reason. In a simple partnership or sole proprietorship, creditors or litigants can try -- often successfully -- to seize owners' personal assets such as homes, savings accounts or cars, should things go askew. But once incorporated as an LLC, you and the other "members," as they are called in such a structure, usually put nothing at risk other than the investment you've put into the company's coffers.

For example, a foreclosure against your LLC wouldn't create any personal liability for you and the others, unless you or they personally signed for the loan on the property.

There are other benefits as well. If you're simply a one-person LLC, the IRS doesn't ask you to file a separate return. You just report your expenses and rental income on Schedule E of your personal tax return, yet still have the lawsuit protection of the corporate structure. You also get an increased tax shelter for retirement and pension plans under most LLCs, and can deduct benefits such as health and life insurance and travel expenses for you or any employees you might add in your real estate venture. If your LLC has more than one member, then it's considered a partnership for IRS purposes and an extra filing is necessary.

It's also easy to transfer shares to your kids as gifts (up to $11,000 per year sans tax) without re-titling the deed. And should you desire, it's easier to attract other investors into your operation under the LLC umbrella because they'll know your liability -- and theirs -- is limited. Additionally, you can move a little more discreetly into other businesses by forming separate LLCs under different names.

To get started, you'll need a company name (and an alternate if yours is taken), the number of shares your LLC will authorize to members and a listing of who the members will be. You may want to have a business attorney, CPA or other tax professional advise you on the setup, operating agreements and articles of organization, especially if other members are involved.

In a small minority of cases, judges can be convinced to "pierce the corporate veil" of an LLC, so be sure you discuss ways to safeguard against this with your attorney and tax pro.

Good luck!

-- Updated: May 26, 2004




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