Entity Structure Suggestions... - Posted by BRnBA

Posted by JHyre in Ohio on April 01, 1999 at 07:47:44:


WHY the corp? I do not think the corp adds anything (maybe I missed something?) and you may create Personal Holding Company issue. Precence of corp causes extra return and admin fees described in other post. I’d eliminate the corp because I see no benefit to having it in the structure.

Control over distributions is in exchange for subjecting ALL distributions to double-tax strikes me as a bad deal, ESPECIALLY if you are making other flipping income in that corp, because now you have more income to shelter if you want total income< $50k. I do not see any benfit (and lots of detriment) present-value wise.

John Hyre

Entity Structure Suggestions… - Posted by BRnBA

Posted by BRnBA on March 31, 1999 at 07:43:09:

I have been struggling with this for some time now and would appreciate some input from some of you who have been in the same position. I understand Kiyosaki’s position
on this matter but feel that, at least for the now the best vehicle for me might be to transfer title to a land trust with an LLC or possibly several being beneficiaries. I’m speaking of rental properties owned personally that I intend to keep. I am looking for a combination of assett protection as well as tax benefits. At present I don’t have a big tax problem because I do lots of “repairs” as opposed to improvements, however this could be a real problem in the future when all my updates are complete. This is a relatively simple setup but the problem I am having with it is that if I use multiple LLC’s I will need to have a separate bank account for each one. Bronchick says, “hire a book keeper”. Is that the answer? I’ve been considering, actually I know I will eventually form a corporation for Quick Turns, M H deals and such, so is there some way to utilize the corporation for management purposes of the LLC’s so I can use one bank account. Surely there is a way to accomplish this…or am I asking too much? Should I forget the LLC’s and jump on Kiyosaki’s wagon? I would especially appreciate some suggestions from JPiper, JHyre and others who have experience in this field or have been in this same situation (before I pull my hair out). Thanks, BR.

A few other things - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 01, 1999 at 07:33:56:

While ranting, I missed a few things. The presence of the trusts does not change things- use LLC’s as beneficiaries. Bank accounts are annoying, but no big deal. You should be able to get them for free. I prefer seperate accounts- comingling of funds complicates record-keeping AND makes separate businesses look like one big glob. If you REALLY want one account, take Bronchick’s suggestion. I suppose that you could use one of your other companies as a book-keper and pay it a fee, but do not RUN THE LLCs’ MONEY, OTHER THAN THE FEES, THROUGH THAT COMPANY. The "book-keeping"company needn’t be a corp.

John Hyre

Celebrity Deathmatch - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 01, 1999 at 07:13:15:

This post is actually in answer to several posts & e-mails, public and private, re the best structure for holding passive rental properties. Two views seem to dominate the field- Bronchick’s and Kiyosaki’s. In one corner, we have Bill Bronchick. OK, he looks like he’s in high school. Don’t let the disguise fool you. He knows his stuff. Bronchick opines that passive property should be held in LLC’s/S-corps. In the other corner is Robert Kiyosaki. Qualifications: Been there, done that, the dude’s loaded. He likes corps in general (although NOT necessarily for passive investments!). What to do? What DOOOO you do, Kianu?

My free (take it for what it’s worth- it’s for educational purposes only, get a lawyer, don’t sue me, yada yada yada) opinion: For most of us, the pass-through entity is the way to go with income-producing properties held over time. Wait, is this blasphemy? Is an icon being maligned?

No (Yes, I know, very Joe Kaiserish sentence structure. Just don’t tell JTR).

Kiyosaki’s structure undoubtedly works for him. Once your worth some 7-figure+ sum, it may work for you. Chances are that the transaction costs that go with that structure do not make sense for holding passive investments at your current stage in life. To wit: Corporations- especially large ones that need to generate very creative deductions to keep income low- are maintenance-heavy. First off, there’s the Personal Holding Company issue discussed in a recent post. For those of you that missed it, PHC rules say that if corp is 50% owned by 5 or fewer people AND has 60%+ passive income, govt pretends you distributed that income AND pretends that you are in the highest (40%) federal income tax bracket. Sick fantasy. Kiyo has advisors to navigate around PHC rules. Expensive advisors. $400+/hour advisors. People who’ve been doing tax stuff as long as I’ve been sucking in air. My guess is that most of us aren’t at the stage where we pay too many people that much for too long.

But this is just the beginning. Corps are also subject to related party rules. That is, if two or more corps are 50% by five or fewer people (GROSS simplification) they are related. Easy to get around? Did I mention that the govt (for the People, by the People) pretends that you and most of your relatives and any entity that you/they own are the SAME person. By the way, if the corps are related, govt may apply the 15% $50k bracket as if all the corps were one corp. Ouch. Welcome to 35% corporate bracket (including “recapture” of 15% bracket) plus taxes on distributed income (remember, they may pretend distribution has occurred…).

Wait, I’ll just transfer excess income to other corps in the form of “consulting fees”. If I have some REALLY good friends, we can set up corps and play a shell game with consulting fees being the ball. Enter the common law rules of “economic substance over form”. If the fees are contrived, they are ignored or worse. Bottom line- the govt gets to pretend, YOU don’t. Can these rules be gotten around? Sure, for a price, including paying the advisor to discover ALL of your unique facts and circumstances…by now you get my point. Corps require lots of maintenance. You must decide whether the maintenance is worth the price. At some point, it is. When it comes to passive properties (as opposed to FLIPS!), the benefit gained- if any- is probably not worth the transaction costs for most of us at our current stage of development.

By the way, do not misinterpret Kiyosaki: The rich are NOT favored under the tax laws. Corporations are NOT necessarily favored under the tax laws, although they used to be. The Rich are targeted by tons of phaseouts and nasty rules. When Kiyosaki was learning from Rich Dad, high-bracket people were taxed at 90% rates (and we were the FREE world…). Corporations, however, had MASSIVE loopholes, so those with the resources and incentives to use them (the Rich) paid few or no taxes. From 1956 on, corps and other tax shelters have been squeezed HARD. In particular, I mean the Double-Cross (err…Tax Reform Act) of 1986. In 1986, loopholes were exchanged for low tax rates. Once the exchange was done, Congress and the Bush-Clinton Administration (that word is intentionally singular, for those of you that care) raised the rates. Are the rich favored nowadays? No, they just have the resources to be less screed- big difference. And getting screed less is getting more expensive all the time, thanks to those wonderful people in DC. My point- toys of the Rich (corporations in particular) are NOT automatic solutions to ANY problem. I’ve noticed a mind set in some quarters that they are some sort of magical elixir against taxes- nothing could be further from the truth. Corporations are effective in certain situations IF properly crafted. They are generally a lousy choice to hold passive investments.

And don’t get any ideas from the Rolex example given at the convention. Maybe there’s a trick I missed- I doubt it. That Rolex IS income to the recipient. Let me repeat: IF THE CORP GIVES YOU SOMETHING, THAT SOMETHING IS INCOME TO YOU UNLESS ONE OF A VERY FEW EXCEPTIONS APPLIES. Similar strategies are NOT for the faint of heart. Be prepared to pay those advisors LOTS on audit. Similarly, Nevada Corps are not usually a good idea if you don’t live in Nevada. There’s a reason that NV (and Cayman Island) corps attract special attention from the IRS.

I digress. I agree with the Bronchick approach- use pass-through entities for passive investments- corps offer few advantages and numerous pitfalls for such investments. Corps are MUCH more useful for flipping and reinvesting at HIGH rates of return. They still have the some of the same problems and expenses described above, but at least you’ve got something to gain in exchange for the complexity and expense.

John Hyre

Re: Entity Structure Suggestions… - Posted by Rob FL

Posted by Rob FL on March 31, 1999 at 18:17:18:

I just got over the hurdle you describe. I own several rental properties each titled in a different trust, but many have the same s-corp as a beneficiary. I formed a management company and simply informed my tenants to make all their checks payable to the management company. No need for all those checking accounts.

Re: Entity Structure Suggestions… - Posted by DougO(NM)

Posted by DougO(NM) on March 31, 1999 at 09:34:32:

I would offer the following suggestion and would like feedback from anyone reading this.(You too JHyre!) Each property could go into a seperate land trust. The beneficiary of each land trust could be the same LLC. The single member could be your family limited partnership, living trust, etc. Then set up your corporation. Have it master lease all of your properties from the trusts and then sub-lease them to the tenants. You can control most of the cash flow through the corporation, sending only whatever you decide is a fair rental amount to the LLC (a landtrust is a grantor trust hence it is flow-through & no seperate Tax Return is needed)In this scenario you would have a corporate tax return, the LLC tax return and your personal. Let me know what you think
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No C-corp… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 01, 1999 at 07:54:00:

as a manager. Consolidates your admin. I like seperate accounts for each business (as opposed to property), sounds like all the properties are part of one rental business, so comingling is not an issue. Good idea.

John Hyre