Q: A few business partners and I are considering starting a limited liability company to purchase lower-end housing.
We would invest a few thousand dollars to update and then resell these homes at a profit.
What is the best way to research how to set up this company?
A: There are several vehicles you can use to start a business. One of them is to do business in your own name and the names of your business partners. Most people would not recommend that you do it that way.
The second is to set up a limited partnership, corporation or limited liability company. For real estate purposes, most people agree that a limited liability companies gives its organizers the most flexibility in terms of structure and for income tax purposes.
Whether you chose a limited partnership, corporation or limited liability company (LLC), your aim is to have a vehicle that will insulate you in case problems develop with your venture. These problems can involve litigation with third parties or even creditor problems. In each case, the entity you choose should shield you from creditor’s claims should something happen.
An LLC shields its members from claims from creditors and litigation matters. The LLC also permits the tax benefits of the LLC to flow directly to its members.
If you take a large corporation, corporation’s income is generally taxed and its distributions to its shareholders are also taxed as dividends when the shareholder receives them. While there is another type of classification for federal income tax purposes for small corporations, this other classification does not afford owners the flexibility of an LLC.
To form an LLC, you should consult with an attorney who specializes in forming companies or you can do it yourself with some of the do-it-yourself kits that are available over the Internet.
But whatever you do, make sure the organizational documents you have contain provisions to help you and your partners sort out the many issues that can arise with the co-ownership of the company, including breakups, decisions that can’t be made, death of a member, bankruptcy of a member, divorce, and sale of an interest in the LLC.
If you don’t have these provisions in your documents, you may find yourself in a situation that could have been prevented but later causes greater harm because no one is willing to work with you to solve the problem and you don’t have a document to help sort out the mess.