One of the decisions you need to make, when starting your own real estate business is whether to establish yourself as a corporation. This is an important decision, which relates to taxes and personal liability.
Following are some of the advantages offered by a corporation but you should review all the elements of incorporation with your lawyer or your tax advisor:
Ø Asset protection: By incorporating, you establish your own Asset Protection plan. Incorporating allows you to separate your business transactions and assets from your personal assets. Thus, in case of a lawsuit, you are protected from losing everything, including your retirement plan. A corporation protects everyone involved, from the stockholders to the officers from liabilities carrying over from the business to their personal assets.
Ø Privacy: Incorporation allows you to protect your personal wealth from the public eye. Some states offer especially advantageous protective privacy laws that keep the owners’ identities off public records, while still giving them full control over their company.
Ø Tax savings: A corporation pays 15% tax for the first $50,000 of profit – the amount left after all expenses are paid – while an individual can be taxed up to 28%. Federal taxes are also lower for incomes above $250,000. Because a corporation makes its purchases before taxes, it spends pre-tax dollars, which are worth much more than after-tax ones spent by the individual. Many corporate owners have managed to legally zero out their corporate taxes using this strategy. Thus, your corporation can pay for many of your basic needs – health care, education, meals, travel, equipment, your car and any moving expenses with pre-tax dollars. You can also transfer these benefits to the next generation, since the corporation can outlive you. A corporate pension allows you to save tax-deferred money for retirement. With the right insurance plan, a corporation can save on medical insurance premiums by 100%, while other organizations can deduct only about 30%.
Ø Perpetuity: A corporation lives no matter what happens to its officers, directors, and even its shareholders, as opposed to a partnership, sole proprietorship, or limited liability company (LLC), where substantial red tape is involved to keep the business in existence, if you lose a partner.