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3.
Why do so many people form a limited liability company (an
“LLC”) to buy real estate? Why not use a corporation for this purpose?
We find that many of our customers use an LLC to hold their real
estate in order to protect their other assets and property from claims that
might result from their real estate investment. If the LLC is formed and managed
correctly, customers can limit their potential liability if there is a claim or
lawsuit relating to the real estate. Although an LLC and a corporation can both
help protect our customers from liability, we find that many of our customers
choose an LLC to hold real estate. An LLC offers investors more freedom in how
they can manage their investment, and may not require some of the formalities
usually required with a corporation, such as annual meetings of stockholders. In
addition, an LLC can have tax advantages over a corporation. For example, an LLC
with only one owner may not have to file a separate tax return and its profit or
loss can be included on the owner’s tax filing. In contrast, a corporation must
file a separate tax return.
Summary:
Many of our
customers find that an LLC provides them with a simpler and more flexible way to
protect their assets from claims that might result from their real estate
investment.
An LLC may have
tax advantages over a corporation. For example, an LLC with one owner may not to
have file a separate tax return and its profit or loss can be included in the
owner's personal tax return. A corporation must file separate returns.
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4.
What’s the best entity to hold real estate?
Choosing the best entity to hold real estate investments is
typically dependent on the particular circumstances involved, such as the size
and nature of the company's business, and number of owners or members and their
respective rights and obligations. We find that many of our customers use an LLC
to hold their real estate in order to protect their other assets and property
from claims that might result from their real estate investment. If the LLC is
formed and managed correctly, customers can limit their potential liability if
there is a claim or lawsuit relating to the real estate. Although an LLC and a
corporation can both help protect our customers from liability, we find that
many of our customers choose an LLC to hold real estate. In addition, an LLC can
have tax advantages over a corporation. For example, an LLC with only one owner
may not have to file a separate tax return and its profit or loss can be
included on the owner’s tax filing. In contrast, a corporation must file a
separate tax return.
Summary:
Selecting the best
entity to hold real estate investments is typically dependent on the particular
circumstances involved, such as the size of the company's business, and the
number of owners or members.
Many customers
find that an LLC provides them with a simpler and more flexible way to protect
their assets from claims that might result from their real estate investment.
An LLC may have
tax advantages over a corporation. For example, an LLC with one owner may not to
have file a separate tax return and its profit or loss can be included in the
owner's personal tax return. A corporation must file separate returns.
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5.
How do I change my mortgage from my personal name to the company
name?
If an individual investor owns real estate in their own name and
has a personal loan and mortgage relating to that property, they will need to
negotiate with their lender to attempt to transfer the loan and mortgage to the
LLC. Whether the lender will agree to allow the LLC to replace the individual
investor as the borrower on the loan and mortgage will depend on the particular
circumstances presented. Moreover, in connection with agreeing to transfer the
loan and mortgage to the LLC, the lender may require changes to the terms of the
loan and/or additional collateral or personal guaranties.
Rather than attempt to transfer an existing loan, the LLC may seek
to obtain a new loan and mortgage, such that the proceeds of the new loan would
be used to pay-off the individual investors’ outstanding personal loan in
connection with the transfer of the property to the LLC.
Typically, lenders, such as a mortgage company will grant loans
only if they are satisfied that the borrower has the ability and resources to
repay the loan.
Keep in mind that the real estate purchased by the LLC or corporation typically
must be pledged as collateral for the loan. [See FAQ #2].
Of course, in order for the LLC to obtain a loan and mortgage with
regard to the property, it will be necessary to transfer the property to the
LLC.
Before transferring the deed of a property into an LLC, the LLC must be formed. NxtTek can help properly form and maintain an
LLC. To transfer a deed to an LLC,
the deed will need to prepared in the LLC's name and filed and recorded in the
appropriate office(s) located in the jurisdiction in which the property is
located (usually the county’s recorder of deeds office). The deed must be signed
by the person or entities transferring the property, and will require the proper
notarizations.
There may be costs and tax issues relating to such a real estate
transfer and changes to existing loans and mortgages, which can vary
significantly based on the terms of the transaction and other circumstances.
Given the many important issues presented in such a transaction, it is often
prudent to obtain advice from a real estate attorney.
Summary:
In order for an
individual investor to transfer a loan or mortgage to an LLC, the investor will
need to negotiate with their lender.
Alternatively, the
LLC may seek to obtain a new loan or mortgage, which can be used to pay-off the
individual investor’s existing loan.
In order for the
LLC to obtain a loan with regard to a property, it will be necessary to transfer
the property to the LLC.
There may be costs
and tax issues relating to the transfer of the property and making changes to
the existing loans and mortgages. Given the many important issues relating to
such a transaction, it is often prudent to obtain the advice of a real estate
attorney.
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6.
Should I form an LLC for each property?
Many of our customers form an LLC to hold and manage their real
estate in order to protect their personal assets from a claim or lawsuit
relating to their real estate investment. If an investor owns multiple
properties, he or she may be able to further protect his or her assets by
forming a separate LLC to own and hold each separate property. If the separate
LLCs are properly formed and maintained, then theoretically only the assets
owned by a specific LLC would be subject to claims or lawsuits against that LLC.
However, there are costs and administrative responsibilities associated with
forming, qualifying (if necessary), and properly maintaining multiple LLCs,
which should be considered in deciding whether to form separate LLCs for each
property.
Summary:
Many of our
customers form an LLC to hold and manage their real estate in order to protect
their personal assets.
One option to
provide additional protection may be to properly form and maintain a separate
LLC to hold each property. However there are costs and administrative burdens
associated with properly forming, qualifying and maintaining each separate LLC.
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7.
My friends and I have formed a real estate investment club. We
recently purchased our first property. And we each have equal ownership of the
property. We’ve heard it’s best to form an LLC, but does that apply to
multi-investors as well?
The benefits of forming an LLC, which are explained below, apply
with equal or greater force to multi-investor situations. Each investor has a
strong interest in attempting to ensure that their personal assets are not
subject to claims relating to the real estate investment. In fact, absent
forming an entity such as an LLC for their investment, the investors could be
deemed “partners” and, as a result, could be liable for the actions of the other
investors. In addition, as previously explained, an LLC offers the parties
significant flexibility in the management of the property, which is very helpful
in multi-investor situations. For example, in the LLC operating agreement, the
investors can expressly set forth and/or limit the rights, powers and
obligations of the manager and the members. NxtTek can help protect an
investor's other personal assets by properly forming the LLC and helping to
ensure that it is properly maintained.
Many of our real estate investor customers form an LLC to hold and
manage their real estate in order to protect their other assets from liabilities
or lawsuits that might result from their real estate investment. If the LLC is
formed and managed correctly and there is a claim or lawsuit relating to the
real estate, then generally only the assets owned by the LLC, and not the
investor’s other personal assets, will be subject to the claim or lawsuit. NxtTek can help protect an investor’s other personal assets by properly forming
the LLC and you helping to ensure that it is properly maintained.
Although both an LLC and a corporation can help protect an investor
from liability, we find that most investors choose an LLC to hold their
investment real estate. An LLC can offer more freedom in the management of the
property. For example, in the LLC operating agreement, the investors can
expressly set forth and/or limit the rights, powers and obligations of the
manager and the members. An LLC also may not require some of the formalities of
a corporation, such as annual meetings. In addition, an LLC may have tax
advantages over a corporation, such as an LLC with only one owner may not have
to file a separate tax return and its profit or loss can be included on the
owner’s tax filing. In contrast, a corporation must file a separate tax return.
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8.
If I place assets in an LLC, and these assets are included in my will, if
my plane crashes, how is this dealt with by the courts since I don't "own" the
assets?
There are
two ways that this can be handled:
1. You
actually own the LLC (like shares of stock - in this case they are called
"Membership Interests"). These Membership Interests are assets and they can be
included in your will or owned by a living trust.
2. You might also use this unconventional approach:
Select a trusted friend/relative (whoever you want to control the asset after
your death) to be the "Successor Manager" of your LLC's. Structure the
LLC so
that the Members (owners of the LLC) are third persons or entities (such as
another LLC). This is written into your Operating Agreement. After your death,
the "Successor Manager" simply shows the bank the death certificate and they
take over as signer of the account (you can also add them as signers while you
are still living). Because they are now the "Manager" of the company they have
the power to "bind" the company. This means they can buy, sell or transfer any
assets of the company including deeds (real property) and personal property.
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9.
In your opinion
is the LLC better than a Land Trust or Living Trust?
In most cases . A trust
requires a Trustee, a Settlor, and Beneficiaries. This takes a little extra
effort to set up and the problem is that someone else knows your business (the
Trustee) and you have to pay them even if payment is only in the form of
increased "love and affection" toward a family member or friend who does it as
a "favor". You also have to "trust" this person because they have power to
convey the assets of the trust. Trusts must also be set up with a limited
duration of existence. LLCs are normally set up to have perpetual existence.
Most trusts, including land trusts and living trusts, are "revocable" trusts.
This means that a creditor can force you to revoke the assets that you
transferred and bring them back within their reach.
Basically, a LLC acts like a
trust without the need for a Trustee. With a LLC you can be both the Manager
and the Owner (also known as the Member or Beneficiary).
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10.
Do I need to file personal or business tax returns to the State of
Michigan?
On the personal level:
Generally, only if you are a resident of the State of Michigan and receive
income through your LLC. On the business level: Generally, only if your LLC
derives income from within Michigan. Consult your tax advisor for
more information.
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11.
Are you
sure there is no public record of who owns the LLC?
Absolutely! Not even the state knows who owns the LLC unless you choose to
disclose that to them - they simply know
who the Resident Agent is. With Bearer Membership Certificates you can achieve an
even higher level of privacy and asset protection.
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12.
What else can you tell me about the Michigan LLC?
The
Michigan LLC is a low-profile, extremely affordable (some asset protection
entities are priced in the tens of thousands which is totally unnecessary), and
a "top shelf" asset protection tool. When combined with an
outside Resident Agent, it is an entity of choice for
those seeking ultimate asset protection and privacy.
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13.
If I file for an
LLC in
Michigan,
do I also have to file or register it in my home state as well?
It depends on
how you will be using the LLC. The rules vary for different types of businesses
but, if your LLC is doing limited business, is a holding company, or if it will
be holding title to real estate - you will likely not need to register it in any
other state. Most states, if not all, only require you to register as a
"foreign LLC " if you meet their definition of "transacting business within the
state". It is relatively easy to structure the LLC so that it does not meet the
definition of "transacting business".
If your business
does meet the registration requirement then you can go ahead and register it but
then have another Michigan LLC own it. This can allow you to maintain the
privacy and asset protection benefits of the Michigan LLC.
If you will be
opening a "bricks and mortar" business with a storefront, you will most likely
need to register your LLC with the state that it will physically be located
in. In this case, you can use a separate LLC to "strip the equity" out of it.
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14.
I
spoke with my insurance agent about putting my vehicle in LLC and they said my
insurance would go up. My question is there any way around rising insurance
rates?
Not really. If you want
privacy by not having your name on the vehicle you will probably have to pay the
higher business rate. If asset protection (of your vehicle) is your only concern
then you can leave the car in your name and have your LLC put a "friendly lien"
on it.
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15.
I'm
also looking into buying a house soon and was curious , should I buy the house
in my name then move it to a LLC, or put it into a LLC to start with?
If you are getting new
financing in your own name it is most likely that the lender will want your name
on the loan and title. In this case you would wait until after purchasing the
property in your name and then you simply deed it over to your LLC.
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16.
Should I take care of all of the transactions ( signing papers etc.) for
purchasing the house or should I get someone else to do that so I keep my
privacy?
Partially answered above.
When buying a property you can sign on behalf of the company as "manager". Most
deeds and mortgages (that are recorded in the public records) only show the name
of the buyer which is the LLC. You can also designate someone else as "manager
for the day" and simply terminate them after they have signed the necessary
documents.
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17.
How
do you go about putting your house into the LLC? Would I just go to the title
company and put it on the deed and take my name off? Are there any fees involved
besides the title company's fee?
You can download a
Warranty
Deed from NxtTek's Document Library or obtain one from your escrow/title
company or real estate lawyer. Enter your name
(exactly as it appears on the deed you received when you bought the property) as
Grantor, and enter your LLC name as Grantee. The LLC name should read like this:
"[your LLC name], LLC, a Michigan limited liability company". Enter the legal
description exactly as it appears on the deed you received when you bought the
property. If you cannot find your original deed, your title policy should have
the full legal description.
Have your signature (as
Seller) notarized and then record it in the County Clerk's Office of the county
where the property is located. There should only be a nominal filing fee. If you
have any questions or problems consult a paralegal, escrow/title company, or
real estate lawyer.
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18.
How do I
avoid paying a "transfer fee" and/or avoid a new property tax assessment when I
deed my property out of my name and in the Michigan LLC?
Each state is different and
some states have "transfer taxes". You can usually avoid these fees by showing
the transfer agent (or tax assessor/county clerk) that you are still the owner
of the LLC and that no material change in ownership has taken place. You can
tell them you are changing title for asset protection and estate planning
purposes. This is done when you take the deed down to be recorded in the county
where your property is located. If you wish, at a later date, you can transfer
the ownership of the LLC to someone else. This now becomes a "personal property"
sale instead of a real property sale.
On January 9, 2009 House Bill 6122 was signed into
law and designated as 2008 PA 473. The law, effective retroactively to January
1, 2007, extends
Michigan's State Real Estate Transfer Tax to contracts for the transfer or
acquisition of a controlling interest in any entity if the real property owned
by that entity comprises 90 percent or more of the entity's fair market value.
Under the new law "controlling interest" means more than 80 percent of the total
value of all classes of stock of a corporation, more than 80 percent of the
total interest in capital and profits of a partnership, association, limited
liability company ("LLC"), or other unincorporated form of doing business, or
more than 80 percent of the beneficial interest in a trust.
However, the law exempts from the tax a conveyance that is one of the following:
(1) a transfer between any corporation and its stockholders or creditors,
between any LLC and its members or creditors, between any partnership and its
partners or creditors, or between a trust and its beneficiaries or creditors,
when the transfer is to effectuate a dissolution of the corporation, LLC,
partnership, or trust, and it is necessary to transfer the title of real
property from the entity to the stockholders, members, partners, beneficiaries,
or creditors; (2) a transfer between any LLC and its members or between any
partnership and its partners if the ownership interests in the LLC or
partnership were held by the same people and in the same proportion as in the
LLC or partnership before the transfer; (3) a transfer of a controlling interest
in an entity with an interest in real property if the transfer of the property
would qualify for exemption if it had been accomplished by deed to the property
between the people who were parties to the transfer; and (4) a transfer in
connection with the reorganization of an entity if the beneficial ownership does
not change.
To read the entire text of the new law, including all circumstances when
Michigan's State Real Estate Transfer Tax applies and all applicable exemptions,
click here:
House Bill 6122.
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19.
When I
transfer my real estate from my name to the LLC do I have to worry about the
"due on sale" clause that is written into my mortgage?
If the lender were to "call
the loan due" they would take a perfectly good, performing loan and turn it into
a problem, non-performing loan on their books. Banks don't want this because it
affects their financial statements and it does not look good to their investors.
All the bank cares about is that the payments are being made. If you make the
payments you should never have a problem. If the payments are
not being made then they will
still come after you even if you transferred the property to an LLC. They will
do this because you were the signer on the note and you are still personally
liable. If you are still concerned about the possibility of the loan being
called due, simply send the lender a letter and let them know that you are
transferring the property into an LLC for estate planning purposes and that, if
they object, to let you know in writing within "x" number of days. Otherwise,
you will proceed with the transfer. When they don't respond, you are okay. Save
this letter. Note: Make sure and add your LLC as an "additional insured" to your
homeowner's insurance policy. Another side note: Banks do not have any one at
the courthouse checking to see if title transfers.
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20.
How to I
put a "friendly lien" on my real estate?
Download a mortgage
document (or Trust Deed if you are in a Trust Deed state) from
http://www.uslegalforms.com that is specific to your state. Enter your LLC
name as Mortgagee (example: "ABC, LLC, a Michigan limited liability company",
Mortgagee) and your name as it appears on your title as "Mortgagor". Insert the
legal description exactly as it appears on your original deed or title insurance
policy. Have your signature notarized and then record the document at the County
Courthouse (County Clerk) in the county where the property is located. In
addition to the mortgage document or Trust Deed document you will need a
Promissory Note which specifies the details of the loan. This document is not
recorded. We like to structure the note as follows:
Principal Balance: [enter
an amount equal to, or exceeding, your equity in the property]
Interest Rate: 10%
Payment Terms: No payments but loan will be payable on demand of the LLC.
Example: "Principal Balance
of $100,000.00 shall earn interest at the annual rate of 10% and shall be due
and payable on demand."
The benefit of structuring
the note this way is that you don't have to make monthly payments that you have
to try and keep track of. The note simply sits on the property accruing interest
(offsetting inflation and appreciation) and is only "called due" when another
creditor attempts to collect a debt against you. Since your "friendly lien" was
recorded first, it has first claim on the equity. In effect, you would foreclose
on your property first (in the name of the LLC) before any other creditor can.
Your LLC has first claim on the equity and whatever is left (if any) will be
available to the other creditor. If you get to this point we recommend you
consult a real estate lawyer to assist with the "friendly foreclosure".
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21.
Where
do I go to get copies of my real estate deeds?
You should have copies of
your deeds in the paperwork you received from the title/escrow company when you
closed on the purchase of the property. Your mortgage/trust deed documents and
Title Insurance Policy should also list your legal description and names as they
appear on the title.
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22.
Can the
Registered Agent receive mail for me?
No. The Registered Agent
does not receive or forward mail (other than official legal correspondence from
the State), unless they offer an optional Mail Forwarding
Service. We recommend that you rent a mail box with a street address (ie. Mail
Boxes, Etc.) in your area to use for mail receiving purposes.
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23.
I recently formed a limited liability company (LLC). The LLC has
no employees. Do I need a separate Federal Tax ID number for the
LLC?
(From the I.R.S. Site) No, you will not need a separate Federal Tax ID number for the LLC if you are
the sole owner of the LLC and the LLC has no employees. If you are the sole
owner of the LLC and the LLC has employees, you will need to get a separate
Federal Tax ID number, if you choose to have the LLC report and pay employment
taxes with respect to employees of the LLC. If you are not the sole owner of the
LLC, you will need a separate Federal Tax ID number for the LLC.
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24.
Also,
how do you put a "friendly lien" on an automobile?
The vehicle must be free
and clear. If it isn't then the current lender is holding the title and you will
be unable to put another lien on it. To put a lien on the free & clear vehicle
you must mail or take the title down to the DMV as the Manager of the LLC and
tell them that you are the lender and that you would like it reflected on the
title. They will re-issue the title with the lien in favor of your LLC.
Typically they will mail the title back to your LLC at the address you designate
for your LLC.
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25.
Tell me
again, why should I get a Michigan LLC?
The Michigan LLC is a
powerful tool that can help you keep your assets from those who seek to take
your property without your voluntary consent. It is our pleasure to help you in
this regard.
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26.
Are there any citizen
or residency requirements in forming a business
entity in the United States?
Generally, an individual does
not need to be a United States citizen or
resident to form a business entity, such as a
corporation or an LLC, in the United States.
However, the entity generally is required to
have a registered agent in the state in which it
is formed, and in the states in which it owns
property and/or conducts business. Also, as a result of
owning an interest in a United States
corporation or LLC, a foreign individual may be
required to file tax returns in the United
States and pay certain taxes.
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27.
I am not based in the
United States, what is the best entity to use
for the formation and operation of my business
in the United States?
Choosing the best entity to
own assets and/or operate any business, is
typically dependent on the particular
circumstances involved, such as the size and
nature of the company's business, and the number
of owners or members and their respective rights
and obligations. Although forming and properly
maintaining either an LLC or a corporation can
help protect you from liability with regard to
the operation of the business, we find that many
of our customers choose an LLC to operate their
business. An LLC can offer more flexibility in
how the owners can manage the company, and may
not require some of the typical formalities of a
corporation, such as annual meetings of
stockholders. For example, the owners of the LLC
can expressly set forth and/or limit the rights,
powers and obligations of the LLC's managers and
members. Essentially, LLCs are contractual in
nature, and therefore, the owners have broad
"freedom of contract" in connection with how the
entity will be managed and how profits will be
allocated and/or distributed. An LLC also may
have tax advantages over a corporation with
respect to United States federal and/or state
taxes. For example, an LLC with only one owner
may not have to file a separate United States
federal tax return and its profit or loss can be
included on the owner's United States federal
tax filing. In contrast, a corporation must file
a separate United States federal tax return.
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28.
After I form a
business entity in the United States, what do I
need to do in my home country?
The reporting and/or filing
requirements, if any, in an individual's home
country will depend on the laws of that country.
Therefore, it is advisable to consult the laws
of your home country to determine the
obligations resulting from the formation and
ownership of the business entity in the United
States.
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29.
Can nonresidents own
shares in a United States S-Corporation and/or a
C Corporation? Can nonresidents own an interest
in a United States LLC?
A nonresident alien may not be
a stockholder of a U.S. S-Corporation.
Generally, there is no restriction on who may
own shares in a U.S. C corporation or own an
interest in a U.S. LLC.
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30.
Can a nonresident
serve as an officer and/or director of a United
States corporation, or as a manager of a United
States LLC?
A nonresident may serve as a
corporate officer or director of a U.S.
corporation, or as a manager of a U.S. LLC.
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31.
If I am a nonresident
that formed a United States corporation or LLC,
do I have to file a federal United States tax
return?
The mere ownership by a
nonresident of stock of a United States
corporation typically does not create individual
filing obligations. However, a nonresident may be
subject to U.S. Federal income tax on dividends
(or other distributions) paid to him or her by
the corporation. It is important to note,
however, that the corporation will need to file
a federal tax return. United States LLCs typically
do not pay taxes directly, but may be required
to file tax returns.
The earnings and/or losses
of an LLC are allocated to the members (who each
receive a form K-1 from the entity), and the
members are required to report such income or
losses on their individual tax returns and pay
applicable taxes. As a result, the members may
have filing obligations and incur individual
United States tax obligations due to their
ownership of an interest in the LLC. To the extent that a
nonresident is required to file a United States
federal tax return, he or she will most likely
also be required to file a tax return in one or
more states.
In light of the numerous
potential filing requirements and other
obligations associated with forming, operating,
and/or owning an interest in, a United States
corporation or LLC, it is advisable to seek the
advice of a qualified accountant to provide
assistance with regard to all tax matters.
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To proceed to the questionnaire.
You
will be able to purchase these services using your major credit card, even if you do not have a PayPal
account, using our secure Check-out at NxtStor.com.