Entity Formation | Form Your Business in the United States

Pros and Cons of forming an LLC for real estate investments

Looking into an LLC (Limited Liability Company)

This legal structure contains the limited liability of a corporation bundled with a programmed tax flexibility. The members become the preferred term for the owners of an LLC. Whatever profits and losses the LLC incurs goes through the legal structure first before going on to the members. This may mean fewer restrictions on profit sharing inside the company. This can also contain limited liability protection for members from business decisions. Aside from these advantages, costs and paperwork can be lessened while granting more flexibility.

A Certificate of Formation stating the Articles of Incorporation comes with the filing of an LLC. The name of the company, the business address, the registered agent become the registered information in the Certificate of Formation.

Let’s review the Pros and Cons of an LLC for Real Estate Investments

The LLC may help protect the personal assets from liabilities that may arise from certain real estate investments for the concerned investors. This has become the common practice for a number of decades in particular states.

Liability insurance can grant some protection from potential lawsuits. But, there are some risks connected to this approach. There are liability policies that, in general, may state exceptions and limitations, but these do not completely protect investors from litigation. The LLC has a broader feel and has inherent benefits with its protective power.

What are the Pros?

When there are legal judgments related to an LLC’s investment properties, there are limits imposed on personal asset exposure.

Taxation benefits can be offered through a pass-through. Even if S corporations have a similar benefit, there are other requirements and restrictions that they need to comply with and limit their usefulness for those investing in real estate.

It is allowed for the LLC to have foreign ownership and investment in U.S. real estate.

The gifting of membership interests accomplishes the transfer of ownership for real estate holdings. Executing and recording a new deed may not be required. This frees up property owners from paying transfer and recording taxes plus other connected fees.

The owner or a third-party manager can run LLC’s. Corporations must have officers and a board of directors.

Profit distribution options can be flexible as well. Members of an LLC can plot out their own distribution scheme. “S” corporations must follow pro rata cash flow distributions.

What are the Cons?

Even with the advantages, not all real estate investors are willing to handle the management of a company. Some would prefer obtaining liability insurance so their personal assets are protected.

For the personal liability protection to take effect in an LLC, separate bank accounts need to be maintained and owners must legally observe corporate formalities. This means acquiring the services of a registered agent and keeping company records in good standing so the LLC avoids default.

The LLC needs to be formed first for real estate investors who are looking to use this channel before any property investments are purchased. It is more convenient to transfer the purchased property through the LLC rather than seeking consent for the transaction from your lender.

Those in a single-member LLC may not have the same level of liability protection compared to that of a corporation.


Entity Formation | Form Your Business in the United States Tax Tips

Tax Advantages: LLC vs. S Corp

It is the responsibility of every business to pay taxes to the government. The amount will depend on the kind of business and its profits. Different forms of businesses also have different advantages in terms of tax dues. There are tax advantages of an LLC (Limited Liability Corporation) and also that of an S Corporation. But here are some of their differences and distinct advantages to enhance your knowledge about the meticulous tax situations in business.


In the case of an LLC, your tax due will be based on your ownership percentage. Say the business’s profit is $150,000 and you own one-third of the company, then tax will be imposed on the $50,000, which indicates your profit.


Similarly, the Internal Revenue Service (IRS) will also tax your percentage-based profit from the business. But if you are also working for the business and are paid a salary, then the tax will be imposed on both your tax and your profit. So based on the figures above, plus your supposed salary of $50,000 a year, the amount the IRS will tax on you will be based on $100,000. The amount is from the salary of $50,000 plus the personal profit of $50,000.


Basically, the S Corporation pays more taxes because of payroll and corporate taxes. So that’s basically one of the tax advantages of an LLC. But it’s not all good in the LLC front. An LLC is required to make quarterly estimated payments to the IRS. However, not all of the businesses under the LLC structure are diligent about monitoring quarterly dues. As a result, the business may get into trouble with the IRS. This puts the S Corporation at an advantage with its payroll service wherein taxes are immediately taken out of the salary.


In both business forms, though, your personal assets will be protected. The LLC business or the S Corp will be treated separately from their individual owners. Both can also deduct pre-tax expenses: advertising, computers, car expenses, gifts, health care premiums, promotion, travel, uniforms, among others. Of course, the deductibles should have been used in relation to the business.


But when deciding which form of business one should create, many will say that LLC may be the best way to go. This is because an LLC can still be converted to an S Corp. However, the opposite could not be done. An S Corp cannot be changed into an LLC.


Anyway, an LLC is easy to set up and inexpensive to start. The red tape in forming an LLC is also not as strict compared to forming an S Corp. However, if the business is growing fast and you foresee the need to invite investors soon, the S Corp would be ideal. Or if you have been holding on to an LLC, it might be time to transform it into an S Corp. It’s easier to invite investors when you are a corporation because of the credibility that comes with it. But of course, with it comes a lot of paperwork and some financial burden because of attorney’s fees and accountant’s fees.


Entity Formation | Form Your Business in the United States Tax Tips

What are the small business tax issues that may arise?

There’s no escaping the need to fulfill your tax obligations. Small businesses should be in the know about the United States Tax Code. Don’t be caught unaware when such small business tax issues creep up at the end of the year. Be proactive in keeping your tax liabilities to a minimum.

So, don’t get threatened by thinking that the IRS is out to get you. Let’s look at some common small business tax issues so the IRS can become more like a friend than a foe.

What are the allowable deductions for a small business?

Deductible expenses are more common in the startup phase of the enterprise. Before any initial sale is completed, the expenses getting to that point can be considered as deductions. Office equipment, purchasing computers, renting a space, and such qualify for these deductions.

Your profit will be the main number used to figure out your tax. This also means that the money left over after listing all the deductions is subject to such a tax. Please carefully list all the expenses incurred so this can be properly recorded and deducted to determine the tax rate.

To be critically informed about which deductions are allowed, please consult with a certified public accountant or a reputable tax attorney.

What are the reimbursements allowed when it comes to medical expenses?

Immediate relatives, family members, and most of all spouses almost always do not get classified formally as employees. This may become one of those significant small business tax issues later on, because remuneration continues to be remitted, but employment classification hasn’t been formalized.

There is a medical expense deduction called the Medical Expense Reimbursement Plan (MERP). Medical expenses not covered by insurance can be utilized by the small business owner as a tax-free benefit. But, this should be relegated only for staff under formal employ. This means family members that are not classified as contracted employees may not be able to fall under the MERP. These medical expenses may unfortunately become non-deductible because of the undeclared status.

When family members are formally recognized, through a qualified MERP, deductions for medical expenses become valid. Health insurance premiums will be accepted as a deduction and this can be a big saving for companies that shoulder such medical costs.

Even if relatives are not fully involved in the business, the documentation should be present to recognize them as employees. These allowable deductions can bring down the tax rate especially when the paperwork is found to be in sufficient order.

What might be considered as a wrong business structure and prove costly later on?

Your business structure can make a significant impact to your taxes. The assessment for tax will be based on how your business is organized. Be well versed in what you can save being filed as a corporation or as an LLC. There is limited insulation from tax liabilities and legal exposure when the LLC model is used.

For most businesses, it is not the wrong choice to adapt such an LLC structure. The business needs to be set up correctly so audit exposure can be minimized wile tax savings can be maximized.

Dealing with small business tax issues should be well-researched and thoroughly reviewed. The guidance of a tax attorney can prove to be quite helpful. If they are experienced in the Tax Code and related small business matters, you should be able to faithfully fulfill your tax obligations.

Hire our Tax Resolution Expert

Entity Formation | Form Your Business in the United States

Things to Consider When Choosing the Right Type of Business Structure

Laying down the organization of your venture has its share of pros and cons. Here are some points to ponder on when discerning the types of business structures that can best suit your needs.

What are the costs for the types of business structures?

The most viable and cost-efficient could be a sole proprietorship or a general partnership. It might cost you more for a limited partnership and a limited liability company. The most expensive is, of course, setting up a corporation.

Will it be an easy or difficult process to set up these types of business structures?

By just opening a business checking account, you might already get your sole proprietorship. A partnership agreement must be written up for those entering into a general partnership. There are more documentation and work involved in a limited partnership, limited liability company, and a corporation. These entities must strictly adhere to state requirements or forfeit the advantages for that particular business entity.

What are the possible termination reasons for the business?

Death can automatically terminate the business entity. This may include the withdrawal of a partner or even divorce. There may be a state-mandated period of time for the business to exist.

What are the privacy issues linked to such structures?

Corporation, especially if publicly listed, are required to submit reports and necessary financial information to the state. A limited liability company or a limited partnership may submit fewer data. There’s more privacy granted to sole proprietorships and general partnerships.

What are the risks involved?

Sole proprietorships and general partnerships are liable for any business debts and obligations. The risk is more spread out with the other structures.

What grants more operational control?

The greatest degree of potential risk comes with the greatest degree of control through a sole proprietorship.

What is the necessary capital?

If a business is undercapitalized, there may be a loss of protection provided by that business entity. Some other business structures may have an easier time in raising capital when needed.

What are the types of business structures that are easy to sell?

The sole proprietor of a business has the authority to sell assets connected to the business. Those in a limited liability company may need to get clearance and approval from the listed partners or members.

What are the accompanying state taxes?

Please verify with a tax consultant what taxes will be incurred by a business entity. Limited liability companies may be subject to such tax levies.

What are the possibilities for expansion?

The types of business structures available determine the size of your organization. As your business grows, there will be advantages and disadvantages to think about when taking in additional capital from partners or setting up a corporation altogether.

So, by going through these questions, you might get a better understanding of which structure best suits you. It may all start as a single proprietorship, but as the business expands, the additional support from going into a bigger business structure may be the way to go.


Entity Formation | Form Your Business in the United States

What are the advantages of LLC in Texas?

There are tax benefits, asset protection, and ongoing support from the Texas Secretary of State for those who set up a limited liability company or LLC in Texas. The characteristics of corporations and partnerships can be seen in the LLC. Let’s look at some other advantages of LLC in Texas.

Protecting your name

In the state of Texas , upon the approved registration of your limited liability company, you will have proprietary protection over your business name. The reputation and brand image for the name of an LLC is safeguarded.

Existing into perpetuity

A sole proprietorship needs its owner to be living for the business to be recognized. The LLC can survive even the death of its founders. Clients, vendors, and employees would greatly appreciate this advantage of LLC in Texas.

Make use of tax savings and flexibility

Corporations get taxed twice because of the profit declared and again when dividends or distributed profits are disbursed to shareholders. The LLCs in Texas can deduct operating costs and business expenses from their gross revenue. Legitimate business expenses can also be honored as deductions so reported profits to the IRS are placed at a lower rate. Depreciation of company assets can also be considered as deductions.

Texas allows the LLC to choose its tax bracket. It can elect to be taxed as a sole proprietorship, partnership, or corporation. The default setting for the LLC is taxed as a “pass-through entity” which is either a sole proprietorship or a partnership. The profits and losses of the LLC “pass through” the LLC to its members. They, in return, report these profits and losses on their individual tax return. Federal income taxes are not incurred by the LLC because of this flexible arrangement, which is a pretty neat advantage for the LLC in Texas.

Personal assets are also protected

If a lawsuit is filed against a Texas LLC, the assets of the business can be taken into consideration by the creditor. But, the lawsuit leaves the personal assets of the members of the LLC untouched.

Support given by the Secretary of State

The LLC registered in the state of Texas means that you are registering the business with the state. Additional protection and support is given via the Texas Business Corporation Act (TBCA) and the Texas Miscellaneous Corporation Laws Act (TMCLA).

Profit choices are also flexible

The state of Texas allows the businesses operating in its jurisdiction to decide the structure of the LLC. This flexibility in Texas allows the LLC to operate as a corporation or as a partnership. Even if Texas doesn’t have a state tax, businesses still need to register with the state for the Texas Franchise Tax.

There is no requirement for record keeping

Minutes of meetings and other records may apply to other corporations. But, for the Texas LLC, these types of business records need not be established or maintained. That’s a considerable advantage of the LLC in Texas.

There is that added air of credibility and professionalism

Having that LLC or Inc. at the end of your business name does make a great impression to your potential clients and partners. LLC’s can also choose to be managed by the members or seek outside management professionals. There is also less formality for the LLC with regards to upkeep and other requirements.

Now that you’ve found out some of the advantages of LLC in Texas, it would be better to consider this option.

Entity Formation | Form Your Business in the United States

When to Convert Sole Proprietorship to LLC or Corporation

Most entrepreneurs start small with the goal of becoming big. Understandably, businesspeople begin by creating a sole proprietorship. Eventually, though, it becomes more practical to convert your sole proprietorship to a limited liability company (LLC) or corporation. So when do you decide to convert?

There is no specific answer as to when exactly you should convert your sole proprietorship to an LLC or a corporation. But, when the company is getting bigger, it is more practical to turn it into an LLC or corporation. If you are not yet comfortable about becoming a corporation, an LLC will do.

The basic reason why an entrepreneur should convert the business is for the company to be treated as a separate entity. In a sole proprietorship, the owner’s money and responsibilities are merged with the company. So if there are business impediments—like a legal or financial one—repercussions affect the personal and business aspects. For example, the business is being sued. If the business is under a sole proprietorship, you, as owner, will be named respondent of the case. However, if the company has been registered as an LLC or corporation, the LLC or corporation will be named respondent of the case.

It is also worth noting that if the company is being sued for financial purposes, under the sole proprietorship, it is the owner who will shell out the money. But under LLC or corporation, the business’s own funds will be used for pay off whatever financial responsibility is raised. So basically, incorporating the business protects the owner/s of the company.

Another answer to the question of when to incorporate is when you feel like the business is getting financially volatile or when you foresee the possibility of multiple cases in the future. Of course, you should try to avoid any form of a lawsuit, but if you expect it anyway, then there is no sense in waiting to incorporate.

There is one school of thought that answers the question of when to incorporate with: AS SOON AS POSSIBLE. This is because it is always best to start the business the right way. And by right, that means giving that business its own personality. But be practical about it though. Even if you want to incorporate right away, you should probably wait until January. This is for purposes of filing tax returns. If in a year the business has operated as sole proprietorship and LLC or corporation, then you have to file tax return for both.

As for choosing between converting to LLC or corporation, this is something you need to think about intelligently. You have to consider the pros and cons seriously. But here is a simple differentiation: the LLC will die along with the owners or partnership. Or the LLC will be dissolved in cases of bankruptcy. However, a corporation can live on forever despite the loss of the founding members. It is also a better option when you plan to issue or sell shares in the future.

Entity Formation | Form Your Business in the United States

The Choice: LLC vs. Inc.

The choice between a Limited Liability Corporation (LLC) or Corporation is not a generic one. You cannot say with certainty that one is better than the other. But there is an entity that is better for the kind of business that you have. Both have distinct advantages, and it all depends on how better fitting these advantages are to the business.


Unlike sole proprietorship or partnership, the LLC or corporation makes a separate personality for the company. This means that the company becomes separate from the owner. That is why in a corporation, the business is taxed separately. The owners or incorporators, too, are taxed as individual citizens. So it’s like they are hit with double taxation. This is why a lot of starting companies choose to do the LLC, because tax-wise, it just sounds better. In the case of the LLC, while the company is treated as a separate entity, the tax is passed through the owner or owners—much like a sole proprietorship or partnership. However, there is no personal liability in case of debt or legal issues.


Even if it seems like having a corporation means being taxed twice, the overall tax an owner pays may actually be lower than if he registered the company as an LLC. Corporate income splitting can potentially lower the overall tax obligation. In terms of raising money, the corporation is also attractive because it can dangle shares in the company to attract investors.


The LLC is also attractive in the sense that owners don’t need to hold an annual stockholders meeting or submit minute book requirements unlike corporations. There is also no limit on the number of owners in the LLC. The downside is that there is no such thing as corporate income splitting, which effectively lowers tax rate, when it comes to the LLC. It also cannot issue stock or stocks.


For most startups, LLC is the easiest route. The process is generally simpler and with less paperwork. However, it is dependent on the state you are opening the business in. States have different pre-requisites when it comes to forming LLC. But these are still generally simpler compared to forming a corporation. Some states even allow the online applications, which make it easier and more convenient for the owners. However, there are also some states that require the additional filing of a public notice. And because the LLC is dependent on the state the company is registered or is operating, there might be some issues on expansion. If the company plans to open another branch in another state, which has a different set of rules or procedures in starting a business, you might have to do additional work. Aside from that, there is also a possibility that the businesses will be treated differently—in the long run—depending on which state the branch is.


Corporations are really advantageous for bigger companies. It has more flexibility when it comes to the company’s excess profits. In the case of S-corporations, dividends, which are distributed to the owners or incorporators, carry a much lower tax rate compared to gross income. As for the C-corporation, dividends can stay with the company until managers identify how to take advantage of the best tax scenario.

Entity Formation | Form Your Business in the United States

Incorporating a Business: S vs. C Corporation

When business is doing really well, there will come a time when the best course of action is to evolve. That would mean becoming a corporation. When a company incorporates, the business will register as a regular corporation. But sometimes, an S corporation is just better for the company especially when it is just starting out. Hower, for an entrepreneur to avail the benefits of an S Corporation, he or she can simply file documents before the Internal Revenue Service (IRS), something that regular corporations need not do. Regular corporations are referred to C corporations.


First, let’s look at the similarities of the two. Both types mean that there will be limited liability on the owners of the company as far as the business is concerned. Incorporating means giving the company—now a corporation—a separate entity. This means that the company will have its own financial records and it can be sued as an entity. The owners will now have limited liability as it has been sucked by the corporation. But as a separate legal entity, it is ruled by a board comprised of directors or shareholders.


The difference between the two corporations lies in the taxes. A C corporation is taxed as a legal entity. But if you file an “S election” before the IRS, then that means the taxes will be shouldered by the shareholders or owners in their personal income tax returns. The advantage of the S corporation, especially if it is just a startup company, is that there will only be one tax—the personal tax return. But a C corporation is taxed twice—the corporation is taxed as well as the individual shareholders.


The S corporation certainly has a great advantage. This is why, expectedly, it is not an option to all corporations. Only those incorporated companies with 100 shareholders or less can be eligible to file paperwork to become an S corporation. There are also other limitations when it comes to ownership: only U.S. citizens or resident aliens can be registered owners or shareholders. C corporations, on the other hand, can have hundreds of shareholders and foreigners can hold shares in the company.


Since most of the companies that prefer to have the regular C corporation have a large employee population, it is understandable that the government would reward owners for giving additional benefits to the employees. C corporations can deduct fringe benefits provided to employees—benefits include health or disability insurance. Shareholders who work for the C corporation do not have to pay taxes on fringe benefits—such as a company vehicle. A shareholder who owns more than 2% of the company cannot deduct fringe benefits.


When it comes to stocks, a C corporation can issue multiple classes of stock while an S corporation can only issue not more than one class. The stocks are advantageous because they carry with them the voting and profit privileges for the shareholders. And because a C corporation allows foreigners to become shareholders, there is a bigger possibility than the company can operate the business in a global capacity—soon.


Entity Formation | Form Your Business in the United States

6 Reasons for You to Incorporate

Most businesses start as either a sole proprietorship or a partnership. But there comes a time when it becomes necessary to become a corporation. So when do you need to incorporate?

When the profits are large enough to merit protection

Forming a business entity is important to separate personal and business accounts and liability. But startup owners don’t find it necessary to jump into the incorporation bandwagon immediately. However, when the profits and coverage of the business become large enough, perhaps the owner should start looking at registering the business as a limited liability company (LLC).

When the business becomes an LLC, the responsibility and liability of a business owner will be limited to his investment in the business. A sole proprietor will have to face loans and legal liabilities on his own and with his own personal money and properties.

When you decide that credibility is important

A corporation gives a semblance of credibility to the business. According to Fox News, adding Inc. or LLC to the name of the company immediately add authority and legitimacy. Customers would look at a business differently if it is incorporated. And the advantages don’t end with customers as suppliers prefer giving better deals to incorporated companies.

When you need to raise money

Because you already have that badge of credibility, it is much easier for the business to get money. Even sole proprietors and partnerships can borrow money from banks and lending institutions, but corporations have other means of raising money: equity financing. This is the process of raising capital or business money through the sale of business shares. The advantage here is that because you are selling shares, you don’t need to pay back with interest and you don’t incur a penalty for late payment.

When you want to sell the business

Corporations are like diamonds—they are forever. While the incorporators die or leave the business, the corporation continues to exist. The advantage here is that if you want to sell the business, it is so much easier to sell it as a corporation rather than a sole proprietorship.

When you want to take advantage of possible tax benefits

An LLC is taxed like a sole proprietorship but better because an owner’s personal liability is protected. But it is actually much more flexible than that because an entrepreneur can also elect to be taxed as a corporation. Either way, there are advantages—so it is up to the owner which advantage weighs heavier.

If the business is incorporated, you also have a choice on when to receive an income from the business. This way, you can choose to get an income when tax is at its lowest. There is also an option of taking dividends rather than a salary, which has a lower tax rate.

When you have dreams of going public

Yes, this seems like a lofty dream. But dreams are free, so why not take it to the maximum? Corporations are the best vehicle to go public. So what are you waiting for? Incorporate now!

Entity Formation | Form Your Business in the United States

6 Common Mistakes to Avoid When Choosing an Entity

Once you’ve decided what business to start, what you want to call it, and other basic decisions—it’s time for the more technical decisions. What business entity should you open? Most startups prefer just to open a sole proprietorship, but it is best always to be armed with background on all the entities to arrive at the wisest decision.

The business entities are partnership, corporation (S-corporation or C-corporation), and limited liability corporation.

Good thing many entrepreneurs have already opened businesses and made mistakes so that you—a prospective business owner—will know what mistakes to avoid when choosing an entity.

Choosing LLC will save taxes

This is probably the most common misconception about limited liability corporation (LLC). LLC will not help you save taxes. It is, however, designed to provide asset protection. You can, however, choose to have your business taxed as a partnership, S-corporation or C-corporation—but it will not save you taxes.

Thinking that a formal entity is not needed

It is true that registering a business entity is another layer to starting a business. In other words, it’s a hassle. But good things always come with a price. People think that having a sole proprietorship is enough because it’s easier than forming a business entity. But financially, this is a huge risk. Having a sole proprietorship means that your personal finances will be integrated with your business finances. This would be a big mistake especially if the business is sued or legally in debt.

Thinking that a business entity solves all the problems

Okay, just because there is a piece of advice to choose a formal entity doesn’t mean you can just think that this can already save you from all the risks of starting a business. Choosing a business entity will protect your personal assets and some other things—but it doesn’t protect you from everything. A business entity will not be able to protect you from legal issues and disaster risks.

C-corporations are better for small businesses

There have been many claims that most of the Fortune 500 companies are C-corporations because they enjoy more deductions. However, there are some C-corporation deductions will not fit the characteristics of small business. Hence, the small business owners will not be able to benefit from it.

Registering corporation in Nevada or Wyoming

Entrepreneur magazine considers this the biggest scam in business: to have business registered Nevada or Wyoming to have assets better protected. There are some benefits to registering in these states, but these are often overrated. Every state has its perks, just take advantage of those rather than get out of state.

Not getting professional help

All the mistakes above will most likely be avoided if we seek the counsel of business and legal experts. Professional help is one of the best investments an entrepreneur should make to set things right at the start. This is essential because one mistake might cause a domino effect of mistakes.