To create a company or not?

[eaitchison]

I currently own some properties in my name only. I want to start investing with my 3 daughters together (they are all in their twenties). Given that we would have all of our four names on title, would it be wiser for us to create an investment company to go on the mortgage and deed or does this option present more costs? Also, we want to start bringing in a jv partner this year. Again, is it more advantagous to all sign on the line or creating a company?

 

[Dan_Eisenhauer]

There are several posts here on this topic. The answer is... it depends. Your lawyer will say, "Incorporate to protect yourself." Your accountant will say, "Do not incorporate and save taxes and expenses." The choice is one of personal preference, and ultimately will be your decision.

There are many REIN members who own numerous JV properties in their own names. There are those who own properties in corporations. You need to get advice from your accountant and lawyer that is specific to your situation. There may be very good reasons that you are unaware of right now to do one or the other.

Does that help?

 

[Thomas Beyer]

Four reasons to incorporate for smaller residential properties:



1) limited liability, unless personal guarantee is required for mortgage



2) income can be paid different ways, such as dividends or management fees to various people



3) JV partner can be brought on board without having him/her on mortgage and to protect them from a disaster, via shares and/or shareholder loans



4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"



Three reasons NOT to incorporate for smaller residential properties:



1) It is more difficult to get a mortgage, as not all banks hand out residential mortgages to small properties held in a corporations



2) you will have to sign a personal guarantee .. so in Alberta, for example, you will be personally liable for a mortgage default if in a corporation, whereas a personally held non-insured mortgage will have recourse ONLY against the property, but not you personally ! This is an Alberta advantage that does not, to my knowledge, exist in other provinces !!



3) annual filing and accounting costs .. probably about $2000 to $3000 or more PER YEAR .. depending on complexity



other links and discussions here:



http://myreinspace.com/rein_members_only/Members-Only_Discussion/81-9751-Tax_Tip__Reasons_to_NOT_incorporate.html



http://myreinspace.com/rein_members_only/Members-Only_Discussion/81-6784-Joint_Venture_Agreements_and_LLCs.html



http://myreinspace.com/rein_members_only/General/83-4779-Business_Income_Vs_Personal_Income.html

 

[eaitchison]

QUOTE (thomasbeyer2000 @ Mar 25 2009, 03:56 PM)
Four reasons to incorporate for smaller residential properties:



1) limited liability, unless personal guarantee is required for mortgage



2) income can be paid different ways, such as dividends or management fees to various people



3) JV partner can be brought on board without having him/her on mortgage and to protect them from a disaster, via shares and/or shareholder loans



4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"



Three reasons NOT to incorporate for smaller residential properties:



1) It is more difficult to get a mortgage, as not all banks hand out residential mortgages to small properties held in a corporations



2) you will have to sign a personal guarantee .. so in Alberta, for example, you will be personally liable for a mortgage default if in a corporation, whereas a personally held non-insured mortgage will have recourse ONLY against the property, but not you personally ! This is an Alberta advantage that does not, to my knowledge, exist in other provinces !!



3) annual filing and accounting costs .. probably about $2000 to $3000 or more PER YEAR .. depending on complexity



other links and discussions here:



http://myreinspace.com/rein_members_only/Members-Only_Discussion/81-9751-Tax_Tip__Reasons_to_NOT_incorporate.html



http://myreinspace.com/rein_members_only/Members-Only_Discussion/81-6784-Joint_Venture_Agreements_and_LLCs.html



http://myreinspace.com/rein_members_only/General/83-4779-Business_Income_Vs_Personal_Income.html

 

[eaitchison]

Thanks for the info. Very good reading. Lots of good points here. I will talk to my accountant in the coming weeks for his slant on it as well. I appreciate the feedback.
Ed

 

[MikeMcCrae]

From the mortgage perspective, some lenders want a company, some don`t. The ones that do want a company require personal guarantees, which takes away any "legal protection" you might have enjoyed by having the company.

 

[Dan_Eisenhauer]

Limited liability in a corporation is not necessarily the case. In all probability, you will give a personal guarantee on every mortgage, thereby piercing the veil of limited liability.

If a tenant or invitee gets injured on a property owned by a corporation, the "victim" is going to sue the corporation and ALL officers and directors of that company. Being incorporated will not protect you in that case. You could be held personally liable for negligence.

Protecting your assets through a corporation is not guaranteed.

Now, if you are buying a property, of any type or size, you can use a shell company to make your offer. If you walk away, for whatever reason, the only body the Seller can sue is the shell company with no assets in it. When I first began investing in BC, that strategy was recommended by my lawyer. It is often used by buyers of larger properties.

 

[Thomas Beyer]

QUOTE (Dan_Eisenhauer @ Mar 30 2009, 01:33 PM) ..

If a tenant or invitee gets injured on a property owned by a corporation, the "victim" is going to sue the corporation and ALL officers and directors of that company. Being incorporated will not protect you in that case. You could be held personally liable for negligence.
...
I am not sure if this is the case .. the owner of the asset is the company. The property manager might be a 3rd party. It is a LONG path to you, the director and shareholder of the corporation !!

 

[brentdavies]

Corporations require annual tax filing and annual corporate filings, which can cost $2000 plus per year.

Our family owns a recreational property with 6 people on title. All 6 persons are listed on title as "Joint Tenants". 2 parents and 4 kids. Same set up with married couple on principal residence. The surviving spouse gets title to the property without tax in event of death of spouse

The advantage is that the ownership transfers to the surviving people tax free in event of a death of one of the owners. (Tax is delayed until the property is sold. )

Disadvantage is changing ownership to the third generation without paying tax. Grandkids, etc.

Another disadvantage is when one party wants out. All parties must be agreement to sell. Corporations can allow one person with the ability to sell or make decisions.

Critical to have a good joint venture agreement is in place. Sometime even more important with family.

Just another option

 

[OlegP]

QUOTE (thomasbeyer2000 @ Mar 25 2009, 01:56 PM)
Four reasons to incorporate for smaller residential properties:



1) limited liability, unless personal guarantee is required for mortgage



2) income can be paid different ways, such as dividends or management fees to various people



3) JV partner can be brought on board without having him/her on mortgage and to protect them from a disaster, via shares and/or shareholder loans



4) different shares % and shares classes allow for elegant profit splitting and separation of "control" from "profit sharing"



Three reasons NOT to incorporate for smaller residential properties:



1) It is more difficult to get a mortgage, as not all banks hand out residential mortgages to small properties held in a corporations



2) you will have to sign a personal guarantee .. so in Alberta, for example, you will be personally liable for a mortgage default if in a corporation, whereas a personally held non-insured mortgage will have recourse ONLY against the property, but not you personally ! This is an Alberta advantage that does not, to my knowledge, exist in other provinces !!



3) annual filing and accounting costs .. probably about $2000 to $3000 or more PER YEAR .. depending on complexity



other links and discussions here:



http://myreinspace.com/rein_members_only/Members-Only_Discussion/81-9751-Tax_Tip__Reasons_to_NOT_incorporate.html



http://myreinspace.com/rein_members_only/Members-Only_Discussion/81-6784-Joint_Venture_Agreements_and_LLCs.html



http://myreinspace.com/rein_members_only/General/83-4779-Business_Income_Vs_Personal_Income.html




Thomas,



If the corporation acts as a "bare trustee", I think you can still enjoy the benefits you stated above, but profit or loss can be stated as your own personal income, i.e. the corporation is holding title but has no financinal interest in the property. That way you don't need to spend $2000 in income tax preparation, as your filing for the corporate income tax becomes a formality.



Do you know anything to the contrary?

 

[Thomas Beyer]

QUOTE (OlegP @ Mar 31 2009, 11:28 AM) Thomas,

If the corporation acts as a "bare trustee", I think you can still enjoy the benefits you stated above, but profit or loss can be stated as your own personal income, i.e. the corporation is holding title but has no financinal interest in the property. That way you don`t need to spend $2000 in income tax preparation, as your filing for the corporate income tax becomes a formality.

Do you know anything to the contrary?
an option .. still you have to file for a corporation annually .. even if 0 income .. or nominal income for services rendered ..

 

[EdLam]

I live in BC and my RE portfolio is in AB. Would I consider registering a business name in BC or AB or both?

Thanks,

Eddy

 

[chrisR]

QUOTE If a tenant or invitee gets injured on a property owned by a corporation, the "victim" is going to sue the corporation and ALL officers and directors of that company. Being incorporated will not protect you in that case. You could be held personally liable for negligence.

Protecting your assets through a corporation is not guaranteed.

Now, if you are buying a property, of any type or size, you can use a shell company to make your offer. If you walk away, for whatever reason, the only body the Seller can sue is the shell company with no assets in it. When I first began investing in BC, that strategy was recommended by my lawyer. It is often used by buyers of larger properties.

First I am not a lawer!
but my understanding is that the corporation will protect to a maximum liability of its assets in all cases except where fraud or negligence can be proved.
Example, - if a tennant or invitee was injured due to insufficient snow removal a negligent case could be brought. However if you had a property manager who had been instructed to maintain the building and walkways, in this case, the victim may sue the incorporation, the property manager and the officers of the company. It is most likely that the officers of the company will not be found negligent. If the awarded damages exceeded the property management and its insurance policy ability to pay, the company would have to make up the difference up to the maximum of the assets of the company - officers and all their other assets would be protected.

To summarize - incorporate and dont act fraudulantly or negligently

Chris

 

[multiroger]

Thanks for many insightful discussions about "To Incorporate or Not To Incorporate?". I am just starting out the real estate investment here in Canada and just curious if I decide not to form a corporation throughout my investment journey, is there any way to protect my assets in the case that the tenants or passengers are injured in my property? Is Tenancy Insurance a mean to protect my assets in case someone sue me?

Besides, does Canada have any other type of legal entities such as LLP or LLC in the States?

Thanks.

Roger

 

[Thomas Beyer]

QUOTE (multiroger @ Dec 14 2009, 08:28 AM) ... is there any way to protect my assets in the case that the tenants or passengers are injured in my property? Is Tenancy Insurance a mean to protect my assets in case someone sue me?
get proper insurance with adequate coverage. Repair fire code deficiencies. Even with a corporation, you may PERSONALLY be sued. But just because you get sued does not mean you are liable.

In addition, you are usually personally liable for mortgages, so ALL your assets are at risk with one bad deal (say a missed environmental liability). Perhaps your spouse, if you have one, should own some assets ?

QUOTE (multiroger @ Dec 14 2009, 08:28 AM) Besides, does Canada have any other type of legal entities such as LLP or LLC in the States?
yes, there are limited partnerships available in Canada. We do not have an LLC equivalent.

Worry about asset ACCUMULATION first .. then asset PROTECTION !

 

[multiroger]

QUOTE (ThomasBeyer @ Dec 14 2009, 11:06 AM) Worry about asset ACCUMULATION first .. then asset PROTECTION !

Hi Thomas:

Thank you for your feedback. Even though I am new to the forum, I`ve found your postings always very insightful and helpful. I really appreciate them. My situation is like this: I have a 2-unit rental property and have committed myself to the real estate investing business. I am wondering if I should form a LLP company now and be ready for more to come, or can I wait after I have acquired a few more properties? Tenants from one unit have their tenancy insurance and I am asking the other unit to purchase it too. The property is under my name only and I am going to write a will that will transfer the title to her in case I am going to heaven (well, maybe

). This is the way I think I can protect our asset. Am I on the right track? I know my question might need a lawyer to answer it, if so, could you recommend some lawyers who specialize in this field?

Thank you very much.

Roger

 

[MarkRivers]

Greetings Thomas,



I have been reading through some of these posts on whether or not to incorporate. I personally have a corp that I use for both consulting and RE purchases which works well for my purposes. I am now starting to speak to potential JV partners and we are discussing the pro's and con's for incorporating to purchase property. I think I pretty well understand the CONS and PRO's #1 and #2 but less clear about the PROS's #3 and #4. I would think that if we set up a corp with equal ownership and similar share classes (Voting A and B for example) then how would #3 apply? Regarding #4, how is "Control" different from "profit sharing"? Is this done by having one owner be the "managing" director and the other owner (in this case the JV partner) be "silent" as a share holder but not director? Any clarification you can provide is greatly appreciated.



Regards,



Mark Rivers

 

[Thomas Beyer]

Voting shares control directors. Directors control management. Management manages corporation. Beneficial ( aka non-voting or preferred) shares can be used for money in- and out-flow - independent of control/voting shares. One way, not the only way, but one way to structure a 50/50 JV is: you could own 100 A voting shares for $10 and control the corporation, and each partner owns 100,000 B shares ( non-voting ) each for $10. Thus, shareholder capital is $30. Then partner puts a loan into corporation, say for $75,000 which is the cash to close plus a reserve plus closing costs. Another option is to open a corporation where only you own shares, and then partner gets added later after asset is acquired, using A, B or C shares ( ie option #4 above if partner is not required or desired on mortgage application, for example). You could also use trusts, undivided interests or LPs. Many options exist.

 

[MarkRivers]

[quote user=ThomasBeyer]Voting shares control directors. Directors control management. Management manages corporation. Beneficial ( aka non-voting or preferred) shares can be used for money in- and out-flow - independent of control/voting shares. One way, not the only way, but one way to structure a 50/50 JV is: you could own 100 A voting shares for $10 and control the corporation, and each partner owns 100,000 B shares ( non-voting ) each for $10. Thus, shareholder capital is $30. Then partner puts a loan into corporation, say for $75,000 which is the cash to close plus a reserve plus closing costs. Another option is to open a corporation where only you own shares, and then partner gets added later after asset is acquired, using A, B or C shares ( ie option #4 above if partner is not required or desired on mortgage application, for example). You could also use trusts, undivided interests or LPs. Many options exist.




Greetings Thomas,



How many people have said 'thank you' to you over the years for the generosity you show in sharing your wealth of information. Many many I am sure. I for one am grateful!



I understand the benefit of using a corp for my situation but I am not sure that there are many significant pro's for the simple "townhouse condo" type deals that I have been doing. To me it almost makes more sense to simply buy the property and bring in the JV partner after with a registered interest on the title and subject to a JV agreement. This way I can move fast on a deal and will know the exact cash to close for the investor. I think that for my first one or two the KISS principal should probably be in order (Keep it simple stupid).



Once again Thomas, thank you for sharing!



Mark Rivers

 

[derekchien]

I own a few fourplex under my name. When I was searching weather or not to incorporate in the future. Most articles talk about passive investments in CCPC have to be taxed heavily. Around 50% in Ontario this year. You need to hire 5 plus employees in order to qualify as active business, which will lower your rate to around 15%.



I just wondering how everyone does it. Do you guys dividends out all the net income to personal name every year? If not, it seems like incoporating is worst than buying it under personal name.