For a moment, let us forget Donald Trump, the presidential candidate for the United States, and let us remember Donald Trump, the real-estate mogul. Regardless of how you feel about his politics, he has had an exciting ride from investing and participating in the real estate industry. His properties are worth millions of dollars, and he negotiates real estate deals worldwide.
When you are operating your business with that much capital and dealing with the enormous risk involved, there is no wonder why Trump Empires is incorporated.
What does it mean to be incorporated?
When one incorporates their business, all members and owners form a consolidated entity representing the company. In essence (legally), the corporation becomes a person at the face of the business. This “person” works as a shield to protect those who may have established this corporation from being sued and sometimes prosecuted. As you can see, incorporating can provide critical protection for your business. But should landlords incorporate their businesses?
Landlords running operations with a few properties should be okay without incorporating, especially if they manage their properties themselves. However, those who work in conjunction with others under the same operation and manage many properties should at least consider incorporation.
A general rule of thumb: the more complex your operation becomes, the closer your business should be to an incorporated status. Real estate properties that are part of a chain or brand are often incorporated. These chains often include hotels, condominiums, and apartment complexes, which have diversified attributes that make the operation more complex than other real estate offerings.
Benefits of Incorporation
As previously stated, incorporating a business provides an extra layer of protection. This protection can shield company employees from financial or legal troubles. For example, a food corporation may be sued for a significant number of people experiencing food poisoning from their products. However, instead of the CEO getting sued, the company is subject to legal proceedings.
The company may have legal funds set aside for the purpose of legal action taken against them. The CEO might not have that kind of cash on hand. It also prevents their personal finances from being tied up in litigation. That means the CEO’s personal life can go undamaged despite a legal fight.
Being sued is never fun, but being incorporated means your company can sue another. Cases for breach of patents or theft of intellectual ideas flood courtrooms, with corporations looking to take back what is rightfully theirs.
Being incorporated streamlines the process of establishing ownership of a particular item at the core of a potential lawsuit. This process is much easier and cost-effective than a single person suing another company over intellectual property theft.
Disadvantages of Being Incorporated
Of course, there is a flip side to corporations being considered “people.” The fact is, people can be held responsible for their actions. People have to pay taxes, and since your corporation is a person, it also has to pay taxes. Though employees are not on trial during litigation concerning your company, being sued or being summoned to court is never a position a company wants to be in.
If an unfavorable ruling is declared against your company, it, unfortunately, reflects the entire company, even though the problem might have stepped from a small sector of the company itself.
How Landlords Should Proceed
The nuances that can be found in the real estate industry can parallel those in other sectors as well. However, landlords are dealing with properties, property rights, leases, and the rights of tenants. If they feel their operation is complex enough with a certain risk standard, they should consider incorporating it to protect themselves.
In the case of Trump, his companies are incorporated, so he has the right to license his name and brand. In addition, he can also distance himself from properties or deals that may have gone south. Landlords with a reputation or a brand to uphold should, without question, incorporate their businesses.
Incorporation is a huge step to take and should always involve a lawyer to ensure you are doing everything correctly with all the correct and accurate paperwork to protect your business.
For landlords and property owners who have plans to expand their operations significantly in the future, the first thing to do is to set up a corporation. A Limited Liability Company (LLC) is the best and most popular formation for property owners and landlords.
Benefits of a Limited Liability Company (LLC)
There are a variety of reasons why, as a landlord, putting your property into a limited liability company is a smart idea. For starters, owning a property as an individual puts your assets at risk in the event of an accident.
Most people don’t realize that if someone were to slip and fall on the property or have any other mishap, this puts the property owner’s home, investments, and savings at risk in the event of a lawsuit. When a property is owned by a limited liability company, on the other hand, the risk is minimized to exclude the property owner’s personal assets.
Now, there’s a difference between an LLC and a Corporation that a lot of people get somewhat fuzzy on. The reason you would go with an LLC versus a an S Corp would be tax liability. If you are the only person on an LLC, you will be taxed the same as a sole proprietorship, if you choose that option. Income, capital gains and the like from that LLC pass directly on to you, so you end up paying taxes just the same as if you were an individual, rather than dealing with the separate tax and double taxation issues that often come with corporations.
For those who do have more than one rental property, putting each into its own, separate LLC can be a great way to protect your assets: this limits the liability to the interest of that property alone and not the other ones. Another option to consider discussing with your attorney is having one parent company and using the LLCs beneath it to own each rental property.
Although it may sound a little complicated, an LLC is actually a rather simple process to get through. It is slightly more expensive than just being the sole proprietor, but it can help ease any fears about protecting your property from future bankruptcy if problems arise. While the wait time and filing fees will vary from state to state, the wait time between filing and becoming an actual business is never too overly long.
Once your state recognizes your company as a legal business, you can then transfer your properties into your corporation. Even if you are the only member of your corporation, this means that your corporation now ‘owns’ the properties. Although a small amount of extra paperwork is required to stay within good standing with the state, keeping the benefits involved is worth the extra work.
Small-time landlords should relax and take it easy because I doubt there would be any significant benefit to incorporating their business. The tax burdens and bureaucracy are not worth the time or money over a handful of properties managed single-handedly with little difficulty.
Ultimately, landlords should only incorporate as needed. As with everything else, there are pros and cons to this business restructuring, and there is no use in taking unnecessary risks or going through impractical measures if the protection incorporation brings will not benefit your return on investment.