To Corp or not to Corp
- Thread starter JSB
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QUOTE (JSB @ Sep 9 2008, 08:54 AM) Hi everyone,
I was advised that I should buy rental properties through a corporation, primarily for liability reasons.
Do any/most/all/none of you do this? I`d love to hear pros and cons.
Thanks
J
Hi J,
I think you will probably get a split decision on this question. I know very competent lawyers and accountants who have different opinions in this area.
Your long term goals play a role in this decision but here is my 2 cents, if you are purchasing single family residential properties with your own funds (not joint ventures) buy them personally with adequate insurance and find a Real Estate Team that is in agreement with this strategy.
Pros: Liability protected with insurance, reduced set up costs and reduced ongoing costs, easier financing.
Cons: ?
I was advised that I should buy rental properties through a corporation, primarily for liability reasons.
Do any/most/all/none of you do this? I`d love to hear pros and cons.
Thanks
J
Hi J,
I think you will probably get a split decision on this question. I know very competent lawyers and accountants who have different opinions in this area.
Your long term goals play a role in this decision but here is my 2 cents, if you are purchasing single family residential properties with your own funds (not joint ventures) buy them personally with adequate insurance and find a Real Estate Team that is in agreement with this strategy.
Pros: Liability protected with insurance, reduced set up costs and reduced ongoing costs, easier financing.
Cons: ?
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Corporations come with significant costs and complexity regarding tax filing and record keeping. It adds a whole new layer to your life. I would only go down that route if the operation is getting pretty large and if the tax savings are sufficient to make it worth it.
I don`t think the liability issues are normally really all that significant. Can you think of any real and even remotely possible liability issue that incorporation would protect you from?
I don`t think the liability issues are normally really all that significant. Can you think of any real and even remotely possible liability issue that incorporation would protect you from?
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- Aug 22, 2007
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Hi,
This is a topic that has been discussed a lot recently on these forums. I do recommend try the search function on the site for key words (such as incorporation, corporate etc).
The issue quickly becomes - there is no black and white answer. It all depends on your 1, 5 and 10 year goals, the other assets you have, the other businesses you operate, tax position etc.
Here is one thread that will give you insights
Incorporation Thread
Try the search function for more.
This is a topic that has been discussed a lot recently on these forums. I do recommend try the search function on the site for key words (such as incorporation, corporate etc).
The issue quickly becomes - there is no black and white answer. It all depends on your 1, 5 and 10 year goals, the other assets you have, the other businesses you operate, tax position etc.
Here is one thread that will give you insights
Incorporation Thread
Try the search function for more.
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- Aug 30, 2007
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QUOTE (vandriani @ Sep 9 2008, 12:34 PM) If you decide that you do not want to incorporate, to start , but then decide you want to in the future, is the process fairly easy?A lawyer can do this fairly easily and quickly. Before incorporating talk to your accountant to see if there are any real tax advantages. I am incorporated. I did it for tax reasons but what made it advantageous for me would not apply to most people. And talk to your mortgage broker. I did not do that. If I had, even with the tax advantages I probably would NOT have incorporated. It makes getting a mortgage considerably more difficult.
QUOTE (GarthChapman @ Sep 9 2008, 12:33 PM) Corporations come with significant costs and complexity regarding tax filing and record keeping. It adds a whole new layer to your life. I would only go down that route if the operation is getting pretty large and if the tax savings are sufficient to make it worth it.
I don`t think the liability issues are normally really all that significant. Can you think of any real and even remotely possible liability issue that incorporation would protect you from?
There are lots of possibilities that are easily contemplated. While insurance can protect you from a lot of it, if for some reason there`s a tragedy (like a fire causing death), and I`m found to be liable, then everything I have is at risk. Likewise if for some reason whatever coverage I have doesn`t cover my liability; I`d hate to risk losing my house and my assets.
It`s certainly not something I foresee happening, but incorporation provides the protection of my personal assets.
In terms of complexity, what makes it substantially more complex? I think I`d still use an accountant, but in terms or record keeping, etc. - can you elaborate on the complexity?
Thanks for your response.
Jamie
I don`t think the liability issues are normally really all that significant. Can you think of any real and even remotely possible liability issue that incorporation would protect you from?
There are lots of possibilities that are easily contemplated. While insurance can protect you from a lot of it, if for some reason there`s a tragedy (like a fire causing death), and I`m found to be liable, then everything I have is at risk. Likewise if for some reason whatever coverage I have doesn`t cover my liability; I`d hate to risk losing my house and my assets.
It`s certainly not something I foresee happening, but incorporation provides the protection of my personal assets.
In terms of complexity, what makes it substantially more complex? I think I`d still use an accountant, but in terms or record keeping, etc. - can you elaborate on the complexity?
Thanks for your response.
Jamie
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Jamie, I am not an expert in this area, but am happy to offer an opinion as a fellow investor. These questions are always best answered by your Accountant and Lawyer, they are the experts and they will know all the details about your situation that can often make a difference in how you should arrange your affairs.
At a minimum, having a corporation complicates your accounting needs, your tax planning and estate planning. You have to keep the books separately, file tax and other annual returns and these things increase your costs.
I strongly recommend you check with your lawyer on your fire liability example - under some cases the courts can `look through` the corporation and assign responsibility to the shareholders (for which you can often be covered under Director`s liability insurance). And also check with your Insurer - you should be have Liability insurance as part of your property insurance package that should cover these types of claims.
Hope that helps,
At a minimum, having a corporation complicates your accounting needs, your tax planning and estate planning. You have to keep the books separately, file tax and other annual returns and these things increase your costs.
I strongly recommend you check with your lawyer on your fire liability example - under some cases the courts can `look through` the corporation and assign responsibility to the shareholders (for which you can often be covered under Director`s liability insurance). And also check with your Insurer - you should be have Liability insurance as part of your property insurance package that should cover these types of claims.
Hope that helps,
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QUOTE (JSB @ Sep 9 2008, 03:50 PM) It`s certainly not something I foresee happening, but incorporation provides the protection of my personal assets.
Directors can be held liable for many, if not `most` responsibilities of a limited company if the creditor or wronged person wants to pursue it. Think of the driver of a car belonging to a limited company. They sue the company AND the driver.
If the desire is to escape public liability, do that with a good insurance policy.
Directors can be held liable for many, if not `most` responsibilities of a limited company if the creditor or wronged person wants to pursue it. Think of the driver of a car belonging to a limited company. They sue the company AND the driver.
If the desire is to escape public liability, do that with a good insurance policy.
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Hi Jamie,
A few things to consider if I understand the different options correctly:
- The higher your employment income the less tax you will pay if you buy under your name (not incorporating) AND the business is losing money. the reason is losses will go against your employment income which can help you. whether you go inc or not heard accountants say first years such businesses are usually not making money......
- On the other hand with Corp you can carry losses to the next year/s.
Therefore, the lower your employment income, the more beneficial it might be for you to incorporate. in my opinion there are mainly advantages to incorporate and the cost itself (around $1000 once to the lawyer plus ~$1000 a year accounting) is not too much.
But.. as Don and others mentioned, there are other factors to consider.
Lastly, I`ll share 2 rules of thumb I heard, with you and the community:
- incorporate if your employment income is less than $50K or you are not working.
- from an accountant: do not incorporate unless your total annual rent from all units is $80K or more, unless you have a special reason to incorporate.
Cheers,
Neil
A few things to consider if I understand the different options correctly:
- The higher your employment income the less tax you will pay if you buy under your name (not incorporating) AND the business is losing money. the reason is losses will go against your employment income which can help you. whether you go inc or not heard accountants say first years such businesses are usually not making money......
- On the other hand with Corp you can carry losses to the next year/s.
Therefore, the lower your employment income, the more beneficial it might be for you to incorporate. in my opinion there are mainly advantages to incorporate and the cost itself (around $1000 once to the lawyer plus ~$1000 a year accounting) is not too much.
But.. as Don and others mentioned, there are other factors to consider.
Lastly, I`ll share 2 rules of thumb I heard, with you and the community:
- incorporate if your employment income is less than $50K or you are not working.
- from an accountant: do not incorporate unless your total annual rent from all units is $80K or more, unless you have a special reason to incorporate.
Cheers,
Neil