Should I set up my tax lien investment group as an LLC or corporation?
Posted on October 2, 2008 by admin
SaveANickelDIY asked:
I have about 20 people in my group that want to invest in tax liens. We don’t want to draw any salaries because our startup capital is quite low. However, we want the liability protection. What makes better sense to form, an LLC or corporation? Either way, we would file S corp status.
I have about 20 people in my group that want to invest in tax liens. We don’t want to draw any salaries because our startup capital is quite low. However, we want the liability protection. What makes better sense to form, an LLC or corporation? Either way, we would file S corp status.
Both entity types provide liability protection. A corporation for which you file an S corp election has the advantage that its pretty easy to find off the shelf corporation docs that you can use and the body of law on corporations is well established.
If you have foreign investors or you want any type of complicated voting or economic structure (lets say that you want some people to have economic but not voting rights or that some class of people get extra money because they also manage the company) an LLC is better because while an S corp is only allowed one class of stock, you can create multiple classes of LLC membership interests with different rights, preferences and privileges (you might think “can’t corporations create difference classes of shares with different rights, preference and privileges?” the answer is “yes, but you can’t create a corporation with multiple class types and make an S corp election. not permitted under IRS rules.”). Also an LLC allows you to forego having annual meetings ,etc. But you do need to put more work in drafting an LLC agreement up front (LLC agreements are less off the shelf — if you use an off the shelf LLC agreement you are risking a lot more than using off the shelf articles of incorporation).
Just as one more clarification — for a corporation to get pass through tax treatment you make an S corp election. For an LLC you don’t — you make a check the box election to be treated as a partnership. LLCs are pass-through tax entities but S corp. is a term reserved for corporation who make such an election and LLCs are not corporations.
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Either way can protect you against liability. But if you have a lot of partners, I would choose LLC. Also, have you talked to an attorney about this? A $1,000 consultation might save you from a $10,000 mess.
Also, you should read up more on tax lien investing and corporate structuring in the Complete Guide to Real Estate Tax Liens and Foreclosure Deeds: Learn in 7 Days [ISBN 0978834682] by Don Sausa. I think it’s available on Barnes and Noble or Amazon.