Posted by MarkHOUTX on June 21, 1999 at 22:35:17:
– A RE-POST SENSE MY FIRST POST DISAPPREARED – A tax attorney with a sense of humor – who would have ever thunk it. Thanks for the great info. JHyre. I am awaiting your next post. I hope you get a chance to stop and smell the roses!
OK a C-corp, but why? - Posted by SCook85
Posted by SCook85 on June 21, 1999 at 11:17:35:
I’m still struggling with what to do as far as my corporate structure goes. I have a number of corps and LLC’s as we speak and am not getting consistant advice from anyone that I talk to.
I’m leaning toward going with C-corps across the board because that is what all the successful people use. I feel that I don’t need another reason, but my partner wants to know why?
We have been advised on 2 occasions to use an LLC for anything that we intend to hold long term, but again, no reasons why. Can anyone clarify this for me?
SCook85
Re: OK a C-corp, but why? - Posted by Bud Branstetter
Posted by Bud Branstetter on June 21, 1999 at 23:08:24:
Steve,
I commented below on an answer to Kevin why you want to separate deals in a C corp versus limited liability entity. The pass thru on keepers and the protection are paramount. Properly administered an LLC and the protection from attachment except for charging orders is a good enough reason. The big boys in business use both entities not just C corps.
The edge will go to you as you learn how to show those long term holdings as L/O for long enough so they aren’t flips. On the ones you buy and sell for cash use the C corp. For the ones you owner finance use the LLC and show as leases/rental property for a lenght of time. George Yeider, at a recent AIREO meeting, gave a good presentation of the details on showing as L/O those keepers/owner financed so as not contaminate the LLC as a dealer.
Sorry… - Posted by JHyre in Ohio
Posted by JHyre in Ohio on June 21, 1999 at 19:36:53:
that is too short with too little detail because I’m a teesey bit busy. Meant to answer the “Steve Cooke, Inc.” post & didn’t for the same reason. Here’s a quick and dirty:
Multiple related corporations are likely to be classified as one corp by the IRS, especially if the business conducted by each is identical or heavily inter-related. This means ONE $50,000 15% bracket for ALL/MOST of your incorporated businesses. If this were not the case, I could create a new corp for every $50k in income and never pay over 15% in taxes. There is no bright line in terms of how close the business relationship must be between each corp to attract reclassification as one corp. For example, a buying corp and related corp may or may not be reclassed as one corp- depends on all the facts and whether the IRS agent has recently engaged in nocturnal activity of the more pleasant sort. In fact there is no statate that I no of that specifically addresses this situation. There is a nasty and VERY broad one in the form of IRC 482. IRC 482 basically allows the IRC to reclassify transactions if a tax-avoidance purpose is involved. Way broad, subject to the ever objective and reliable judgment of the IRS. This statute has been used to reclass lots of different transactions. I believe that it would be successfully to avoid creation of too many 15% brackets with multiple related corporations. So as a general rule, lots of related corps are setting one up for a possible fall.
Before the question of multiple corps ever comes up, one must consider this question: Why use a corp at all? Here’s the situation where a corp is useful:
ACTIVE business that REINVESTS earnings at a HIGH RATE and can create enough DEDUCTIONS to keep income below $50,000 to $100,000. Specifically:
ACTIVE- because too much passive income in a corp makes a Personal Holding Company. Without going into the gories, rest assured that being the owner of a PHC is alot like dropping a bar of soap in a room full of convicts.
REINVESTS- if earnings are being directly distributed, you are being double-taxed. By definition, double taxation is worse than single taxation if the rates for each are comparable. See prison shower room analogy (latter word is not intended as a pun).
HIGH RATE: Assuming that some double taxation will eventually occur means that we are playing a present value game. We eat the low 15% rate now and another tier of taxation later on at least some income because paying 15% now + HIGH COMPOUNDING more than makes up for any tax on dividends that are eventually distributed. If rate of return is “low”, there’s not a lot of compounding and the present value of after-tax distributions would have been higher paying a SINGLE high rate now (i.e.- using an LLC) than paying a low rate now and a second higher rate much later, as is the case with a corporation.
DEDUCTIONS: If you cannot keep the corporation’s rates in the 15% bracket (or 25% bracket if you have very high personal rates), the initial tax is as high or higher than what the SINGLE LLC tax would have been. Add just the potential for a second tax and you WILL lose the present value game as a matter of mathematical cetainty. Once you have HIGH INCOME and cannot keep it down with deductions (Kiyosaki uses as much depreciation as possible, but as he said, he can’t get enough of it), it’s time to convert the C-corp to an S-corp or LLC or sell the shares if they are REALLY liquid (Like NYSE listed & no thin trading- Yours won’t fall into that category).
Passive holding is best in LLC because in C-corp:
Appreciation is taxed at higher rates (personal capital gains rates are much lower than corporate) twice. Also, passive income can turn C-corp into PHC. Other factors…rate of return, reinvestment, deductions…mentioned above of course factor in. Ultimately, the best way to do this is put a pencil to it. If you’d like to present mock figures, I will address them as time permits…probably on a weekend.
Re what successful people use- SCALE MATTERS. The ability to shift overseas, have access to public capital (and I mean major-exchange listing) and hire legions of professionals changes the nature of the game. Even then, many C-corps would love to NOT be C-corps- problem being, the price of exiting corporate solution is VERY high in most cases.
NOT ALL successful people use corps and certianly not for EVERY line of business. I have NEVER seen that, but I’ve seen lots of successful people. I’ve also NEVER seen someone with a corp that has the primary purpose of holding passive assets. I see few small businesses held in corporate solution, although some of those change to corps when conditions warrant (e.g.- scale). I really think that imitating successful people without knowing that you are in the exact same situation- type of business, scale, etc- is not a good idea. I’m with your partner- know WHY you are using a given structure. Put a pencil to it- in other words project the numbers and plan accordingly.
In the future, I would love to write a comprehensive piece on this. Even if I find the time to do all of the research, it’d still end up being a book. I apologize for the disjointed, cursory and incomplete nature of this post…sadly, to do more impinges on other priorities at this time. Based on what I’ve seen at the Big Five, in corporate America and doing a little side work, corporations work in the situations I described above and are a massive burden in others…let me repeat- NOT ALL successful people use corporations for every circumstance…one size does NOT fit all. Time permitting, I will happily expound in manner understood by speakers of the English language. Bear in ming that changing INTO a C-corp is alot easier and MUCH cheaper than converting OUT of one.
John Hyre
Re: OK a C-corp, but why? - Posted by CarolFL
Posted by CarolFL on June 21, 1999 at 17:33:43:
Steve,
Get Bronchhick’s Advanced Asset Protection materials… it will regale you with info on all of the above. Not only that, he takes cases of folks with various combinations of kinds of businesses and structures various combos of entities.
I love it!
Carol
Re: OK a C-corp, but why? - Posted by JPiper
Posted by JPiper on June 21, 1999 at 12:13:28:
Steve:
Let’s take a scenario. Let’s assume that you hold properties long term?.and that the income from those properties is rental income (lease/option or otherwise). When the corporation receives that income, and when you decide to pay that income out in salary, it is subject to tax?.to include social security tax. Rental income is not subject to social security tax when it is received personally, or when it “passes through” an LLC (unless the LLC has elected to be taxed as a corporation).
Further, a C Corp is subject to double taxation under certain circumstances. Whether that becomes a problem depends on how you’re using the corporation.
I would also say that the risk characteristics of a corporation versus an LLC are different as well. You might want to read up on charging orders as they apply to LLC’s.
JPiper
Re: OK a C-corp, but why? - Posted by Sheik
Posted by Sheik on June 21, 1999 at 11:50:44:
Steve:
I’ll start out by saying that I am by no means an expert.
My understanding is, the 2 main reasons are…
You use an LLC for long term holding because of the “pass through” characteristic of LLCs (i.e if you don’t elect to treat your LLC as a Corp for tax purposes)
Any depreciation resulting from your properties in your LLC can offset other income you might receive e.g. salary from one of your corp or spouses income (if you file jointly).
You use a Corp for “cash generating” aspects of your business (such as L/O, flipping etc)
The reason for this is that you would most likely reinvest all or most of your profits back into the business and a c-Corp is tax at 15% (up to 50K) as oppose to 28% ( or in your case higher 
) personal rate.
I hope this is somewhat clear…hopefully a more experienced explanation follows.
Sheik
Re: OK a C-corp, but why? - Posted by Robert(AL)
Posted by Robert(AL) on June 21, 1999 at 23:36:33:
Bud,
You mention in your post that “The edge will go to you as you learn how to show those long term holdings as L/O for long enough so they aren’t flips”. How long is long enough, 1 year, 3 years, 5 years,…?
Thanks,
Robert(AL)
Dude – take a breath and Thanks - Posted by MarkHOUTX
Posted by MarkHOUTX on June 21, 1999 at 22:26:36:
A tax attorney with a sense of humor – who would have ever thunk it. Thanks for the great info. JHyre. I am awaiting your next post.
Sections 1551 and 269 - Posted by JHyre in Ohio
Posted by JHyre in Ohio on June 21, 1999 at 21:33:18:
effectively disallow multiple brackets for multiple corporations. See what happens when I make hasty posts? Same result though.
John Hyre
Reading my handy-dandy Code… - Posted by JHyre in Ohio
Posted by JHyre in Ohio on June 21, 1999 at 21:30:02:
and found that Sections 1551 and 269 deal with tax brackets for multiple corporations…will read & inform. That’s what I get for giving messy, off-the-cuff, impromptu answers…result will be the same though.
John Hyre
Mark (SDCA) A Response To Your Post - Posted by JPiper
Posted by JPiper on June 21, 1999 at 13:30:42:
Mark:
I’m re-posting your question here because it was evidently replaced by another post:
“I am in the same boat as Steve, but I am leaning towards a LLC as my “investing entity” of choice. Could you (or Bronchick if he is listening) post what you know about charging orders? I have not heard that term before. Thanks.”
First, let me remind you that I’m not an attorney. Further, it’s possible that for LLC’s there may be some difference in the law state by state. Finally, Bronchick has written some articles touching on this subject that you should review.
A charging order is the right awarded by a court for a creditor to receive whatever distribution of profits the LLC member may be receiving. The creditor’s remedy does not include the right to any property within the LLC. Further, the creditor does not become a member in the LLC. If the members of the LLC elect NOT to distribute income, then the creditor must wait until the expiration of the LLC to receive these distributions?but in the meantime incurs a tax liability FOR the distributions.
Shares in a corporation can be seized by creditors. Big difference. Ownership of shares gives the creditor a significantly different set of rights to pursue.
Again, talk to a local attorney, read Bronchick’s articles.
JPiper
Re: OK a C-corp, but why? - Posted by Bud Branstetter
Posted by Bud Branstetter on June 22, 1999 at 01:17:32:
The one year gets you to long term capital gains but there is no set rule. Obviously the longer the better. A lot of it will be the rapport with the buyer. Typically buyers like to hold title and are willing to pay a little more down for that. In the lower end most can’t use the deduction for itemizing so you have a better position to suggest the lease/option to them. Lease of longer than the 3 years the IRS likes to look at as a sale. The documentation would be all important if ever scutinized.