All Forum Posts by: Samuel R. Harden

From my experience as an attorney, if you are at the point in your career/investing that a full corporation filing makes sense, then you should at minimum have an attorney help you set it up. That relationship will be important, especially if this is your first experience with a corp. Also important for NC, a corp has a few annual filing requirements at the state level, so make sure you have an accountant if you are not comfortable handling those. (The annual report is a breeze, just make sure someone can do the tax return.)

Another way an attorney could be helpful is in determining if you actually want/need a corp. There are two basic things you are typically trying to achieve by establishing a business entity, asset protection and tax treatment. Just make sure it is an attorney with knowledge of the tax implications of various elections, or speak with an attorney and an accountant.  

I have several clients that have a great lending relationship with a local credit union, Directions Credit Union. I'm not sure if being out of state would be an issue for them or not.

You should definitely sit down with a CPA and/or tax attorney to plan this out. Depending on the size of your investments and the future flexibility you want, it may make sense to create a C Corporation with an S Corporation tax election. While there is a small net income tax for s corps in California, it very likely could make up for it with proper tax planning, and even more so if used as a vehicle to fund retirement accounts for you and your siblings. If the pooled investment is large enough, it may even make sense to create it as a C Corp without an S Corp election.

The main point I'd make is not to be penny smart and pound foolish. Trying to avoid upfront fees, like the 1.5% S Corp tax or not hiring a tax professional, could cost you a lot of money in the long run. 

There is too much here to unpack on a forum, so the usual "speak with your own attorney" caveat applies.

1. Pros and Cons of forming separate entities to take title: This is generally the same pros and cons as forming an entity. Pros - asset protection. Cons - Expenses. Very oversimplified, but that is the core of it. 
2. Forming one entity: You are now a partnership. Make sure you have an agreement drafted that is fair and agreeable to both parties. You will also have accounting expenses, but I think accounting is the area you should NEVER try to find the cheapest option, so you should have those expenses anyway.
3. One LLC and One Funder: This is essentially just a loan/note. If that is not the intent, you need to go back to option 1 or 2 to make sure everyone has their legal rights to the property protected.

I see three issues. First, the more complicated the set-up, the more it usually costs. So it matters if the costs are going to be worth it to you. Second, potential ownership issues with the S Corps. You have to plan this portion carefully, as there are pretty specific rules regarding ownership of S Corps. Third, make sure using an S Corp (or two) is actually beneficial to your intended use. I'd be especially wary here. Typically, the client I talk to that is concerned about identity protection is likely the client that is going to move things around occasionally. S Corps can cause a deemed taxable transaction when property is moved out of one. 

I've heard great things about Directions Credit Union working with new businesses on building credit here in Toledo.

@Account Closed said, you should consult with a professional, especially for dissolution provisions when there will be more than two partners. As far as ownership shares, it would be very easy to set up with ownership matching capital contribution. Just make sure you also account for who will be doing the work, etc. 

As these are flips, it may make sense to incorporate an LLC in your state, then make a federal S Corp Election. You could potentially avoid some taxes, and whomever is doing the work can take a salary, so you don't have to include that in your ownership percentage calculation. This is very dependent on your specific set up and the level of involvement for each partner though, so make sure to discuss this with your professional as well.

I don't see any benefit of a C Corp. Get an LLC and decide if you want to elect S Corp treatment for it. S Corp provides some better planning benefits but less flexibility if you decide not to flip. If you plan on continuing work in IL and only IL, register your entity in IL. If not, register in Cali and get a foreign LLC in IL. Either way, Cali wants their cut. If you plan on doing business in multiple states, register in Cali and get foreign LLCs in necessary states to reduce Cali expenses.

@Jeff B.'s approach is one way to do it. You could also create a new LLC in NJ for the NJ properties, and have a manager resolution or a manager agreement for that LLC, depending on how structured you want to be. I'd suggest this option so your North Carolina property is separate and protected, in case these friends screw anything up.

Talk to a CPA and/or tax attorney that can help you set the partnership up appropriately, but there are a few options. It's up to the two of you to determine what is "fair." One option would be to set up the partnership to pay you back for the loan prior to paying out to the partners (typically you'd still allow a distribution for tax purposes). Another option is the be 50/50 partners, but for the service partner (one who doesn't contribute capital) to only take a profit interest and not a capital interest. There are a lot of legal and tax ramifications of the way you set it up however, so please don't just LegalZoom it.