Protecting Your Investments

Originally posted 2008-12-03 21:37:02. Republished by Blog Post Promoter

In order to protect your real estate investment, you must understand the tax tribulations that can be encountered.  You must first decide on the type of entity that you would like to form. Forming one or more of these entities listed below will protect your individual personal assets, so review this carefully and consult an attorney if the you are considering purchasing real estate and renting it out.

If the LLC (limited liability corporation) is the choice then the articles of organizations will have to be decide to include the shares of the partners, the exiting and entrance of partners, etc.

The LLC allows for pass-through taxation as its income is not taxed at the entity level; however, a tax return for the LLC must be completed. Any income or loss of the LLC as shown on the tax return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.

As with corporations, the LLC legally exists as a separate entity from its owners. Therefore, the owners cannot typically be held personally responsible for the debts
and liabilities of the LLC.

The second type of entity that you may consider is a partnership. Partners operate a business together.  As a partnership each person is liable for any negligence of either partner. By comparison, a limited partnership is an entity formed to raise capital for business or investment ventures in which the partners (except for the managing or general partner) will not be participating in the day-to-day activities of the partnership, and will only be “at risk” for their own investment in the partnership.

The third type of entity is a “C Corporation”.  A “C” corporation which is taxed under Subchapter C of the Internal Revenue Code and is the default corporation formed by incorporating. A “C” corporation is a legal and tax entity by itself. It is similar to a person in that it has its own assets and its social security number, called a Federal Tax Identification Number. Like other businesses, a C corporation needs to have a license to do business in towns in which it has offices and may use an assumed name. A “C”corporation’s assets or ownership is easily transferred through sale of the assets or sale of stock.

The final entity is a “S Corporation”.  A “S” corporation is a corporation which is taxed under Subchapter S of the Internal Revenue Code and must elect to do so shortly after the corporation is formed with the IRS. A corporation is a legal and tax entity by itself. It is similar to a person in that it has its own assets and its social security number, called a Federal Tax Identification Number. The shareholders of a corporation must agree to elect to be a S corporation shortly after incorporating. Like other businesses, a S corporation needs to have a license to do business in towns in which it has offices and may use an assumed name.

Another important thing that you must consider purchasing liability insurance. Liability insurance will protect your asset by protecting you from being held responsible for the other party’s damages.

Please consult an attorney to determine which entity is best for your situation, but above all protect yourself.