BENEFITS & DRAWBACKS OF LLCS & TRUSTS FOR ASSET PROTECTION

Real-Estate & Business Asset Protection Options

Hole-E- Cow! When it comes to Structuring your Business or Real Estate for asset protection, there are a LOT of things to consider. It's enough to overwhelm anyone! I've searched and searched.... and searched... and could not find an article or post that had all of the benefits and drawbacks of LLCs vs. Trusts for asset protection. So I spent hours, days, and weeks sifting through all of the haystacks to find you the needles so that you don't have to. I've also spoken to several attorneys and CPAs... While I learned a lot, I've actually taught them a thing or two- I was shocked that I knew that much. Not to mention, there must be a lot to this if I'm teaching them something.

When considering the various options, you need to ask yourself the following:

What happens from a tax, legal, insurance, and administrative standpoint for each option?

I would recommend that you get a notebook out and take notes on what applies to you under each option, then list each of the 4 things from above underneath each option so that you can come up with the best solution for your assets and/or business. 

By the way, this is not a comprehensive list. I found a lot of the needles in those haystacks, but there may be a couple still out there somewhere. 

BENEFITS OF LLC: 

• Protects Personal Assets: Should the property be subject to a lawsuit, the LLC can only be sued within the constraints of what the LLC owns, and not beyond that. That means your personal assets will not be affected.

• Corporate Shield Protection: Another way your assets will be protected from personal liability is if your LLC is registered in a state with charging order protection. In other words, if a creditor comes after you personally, they are only able to get a charging order against your interest in the company, but cannot touch the assets of the LLC. Best Charging Order Protection is typically offered through the states of Wyoming, Delaware, Nevada, New Mexico, and Ohio- YES OHIO (people are still catching up to this one).  Here's a list of Charging Order Statutes in all 50 States.

• Medicaid Planning Tool: An LLC can be used for Medicaid Planning. When a property is an income producing property, medicaid will not count it as as a personal asset for medicaid purposes, as long as it makes 6% of the total value of the property annually. According to federal law, any real or personal property that is essential to an applicant’s self-support, regardless of value or rate of return, is excluded. That could include farms, rental properties, and other real estate investments that generate income. The catch is that the property must generate at least six percent of its value annually to qualify for the exclusion. 

• No Personal Risk: Owners have no personal risk above and beyond their interest in the company (as long as you have your LLC or parent LLC registered in a state with charging order protection).

• Tax Benefits- write offs.

• Flexible Taxation: You can choose to be taxed as a Partnership, S-Corp, or C-corp. 

• Overall Flexibility: You can change the terms or organization at any time.

• Ability to Pass Ownership Tax Free: A parent can allocate some of the “asset value” and some of the “income” to the adult child as a co-member owner. LLC owners can also easily transfer their ownership in real estate holdings by proactively gifting the company's membership interests to their heirs each year. Over time, it is entirely possible to effectively pass ownership of real estate owned by an LLC to loved ones without ever having to formally execute and record a new deed. This enables property owners to avoid transfer and recording taxes and fees, which can be substantial in many states.

• Foreign Ownership: Unlike an S corporation, foreign ownership and investment in U.S. real estate is possible through an LLC.

• Anonymity: Although you can look up corporations online in many states, and find out who the owners are, it’s a step most people still don’t take. At a community level, LLCs tend to offer more anonymity than realty trusts, unless you advertise the LLC. You can also register your LLC anonymously, and your personal information will be kept private. (However, your LLC has to be registered in a state that allows anonymous LLCs.) There is an exception to this rule, which is if a court orders you to reveal your assets. However, this seldomly happens because of the upfront cost for attorneys and court fees.

• Double Layer of Protection: Having an LLC as a double layer of protection is a smart way to make sure no one can come after your home or other assets, should your insurance fail to cover you.

• Inexpensive: It normally cost anywhere from $50-$200 to register your LLC. Only a few states charge $500-$800.

• For details on LLCs, including how members are taxed, state rules on LLC protection for members' personal debt and asset protection, and more, see Nolo's LLCs section. Nolo also offers a comprehensive online LLC package to form an LLC.

DRAWBACKS OF LLC: 

• Certain Legal Fees: As a company, you must have an attorney represent you. You cannot represent yourself in court.

• Property Taxes: Property taxes may go up if you don't already have a property registered as a rental.

• Borrowing Challenges: Harder to finance a business with no established credit, as opposed to a personal loan, because there's usually more history on a person's personal credit. Interest rates are usually higher for businesses as well.

• Extra Paperwork: If you have an LLC, you have to get a Tax ID, file Tax Return, create an Operating Agreement, follow LLC compliance regulations, and other paperwork. You may also have to pay money in state fees every year (depending on your state-some don't have annual state fees).

• Multiple LLCs Can Get Expensive: If you have a lot of properties, with all of them in separate LLCS, you could end up paying thousands in annual filing fees- if your state makes you pay them annually. Fees are typically in the $100 range, but some states can charge upwards of $500 or more. If you want to use multiple LLCs, but the fees are exorbitant, you can section them off into categories of properties, such as section 8 properties, single families, or section by area, etc. Or you could do 3-6 properties per LLC. This way you don’t have to pay so much in LLC annual fees. Here’s a list of LLC Annual fees by State. 

• Leaves Your Interest Open to Creditors: LLC can leave a portion of your company open to potential creditors-- basically, your interest in the LLC is up for grabs if you have a judgement against you personally, but not the asset or any other member’s interest within the LLC (As long as you are registered in a state with charging order protection).

• May Cost More to Insure: If you transfer a property into an LLC, some insurance companies will charge more because of it being considered a business. However, in my experience, insurance did not go any higher, and the only way the rates would have went up is if it had been years after purchasing the original policy, which means, they'd have to write a new one, and because of the cost to rebuild goes up each year, the policy rate would increase.

BENEFITS OF REVOCABLE TRUST: 

• Self-Representation in Court: It’s not required to have an attorney represent you in court. You can represent yourself.

• Anonymity: Trust would be listed instead of your personal name, however, that doesn't make it safeguarded against creditors. It merely just makes it harder for people to find out who owns the asset.

• Flexibility: You can change it later. Also, if you need to refinance, you can take the house out of the trust to refi, then put it back in.

• Helps Keep Everyone Honest: If there will be several owners of an investment property then a trust is very useful to document the relationships and ownership interests of all the owners, in a consolidated way.

• Estate planning: For those looking to ensure that their investment property can avoid death taxes, many will transfer the investment property to their heirs by way of a real estate trust.

• Avoid Probate

• Privacy: A revocable trust can protect the privacy of your property and beneficiaries when you die as well. Because it's not subject to probate, your trust agreement remains a private document. It doesn't become a public record for all the world to see. Your assets and who you've decided to leave your estate to will remain a private family matter, as opposed to a last will and testament that has been admitted for probate. It becomes a public record that anyone can see and read as soon as it's submitted to the court.

DRAWBACKS OF REVOCABLE TRUST

• Asset not protected - Property is still considered yours as far as estate taxes and creditors are concerned.

• Anonymity is not absolute: It's anonymous until the court makes you reveal your assets.

• Possible Future Fees: Revocable trusts will also have modifications they need to make in the future. These possibilities will require additional legal fees to manage down the road, on top of the original fees.

• Expensive: Costs anywhere from $1000 to $2,500.

BENEFITS OF (IR)REVOCABLE TRUST:

• Anonymity: Property goes into the name of the trust\

• Protection: Impenetrable- nobody can get to the asset(s). The only caveat is the Medicaid 5 yr lookback.

• Avoid Probate

• Privacy: Can protect the privacy of your property and beneficiaries when you die like the revocable trust.

• Estate tax advantages

DRAWBACKS OF IRREVOCABLE TRUST:

• Medicaid 5 yr lookback: Medicaid will look very hard at the trust to look for any way that the money can come back (or be forced to come back) to a Medicaid applicant. If Medicaid finds any opening, the trust will lose its protection against long term care costs.

• Unchangeable: You can’t change it later.

• Loans & Financing more Difficult: Not easy to refinance or get a bank loan against it.

• Lack of Control: Once it's written, signed, and sealed, you give up control of the property to a trustee.

• Possible Trustworthiness Issues: You must have a trustee that you, infact, trust.

• Expensive: Costs anywhere from $1000 to $2,500

• Complex: There's a lot of stipulations, rules, and what-if's, and if they're not all included, you could be up the creek without a paddle. 

• May Not Be Done Correctly: Attorneys may not do it right, and 10yrs later when it comes time to put it to use, it might night work as you had hoped... and the attorney who created it for you is long gone, with the 2 grand you paid them. 

• Tax Returns: Trust must file tax returns and value assets

• No Tax Advantages: No tax advantages other than estate taxes. They are a separate “person” for tax purposes, and the income that the trust earns must be reported and the resulting tax paid. Non-grantor trusts (and this should be a non-grantor trust) must pay at the top income tax bracket whether the trust has high income or low income.

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CALCULATING TAX LIABILITY FOR LLC PARTNERSHIP, S-CORP, C-CORP, & SOLE PROPRIETOR

LLC BUSINESS TAX CALCULATORS

Trying to get an idea what your tax implications and liabilities will be as you set up your LLC? Taxes are so damn confusing aren’t they? Because I started off knowing absolutely nothing about how the different LLC entities are taxed, it's been absolute hell for me to try and figure this whole LLC and business tax thing out, and it took me days of research and many calls to CPAs and business attorneys. If you've reached this article, I KNOW you can relate! So I figured I'd spend a little more of my valuable time writing this article to save you a lot of valuable time. Hopefully this quick article will bring you some clarity.

Tax planning is a critical part of your overall business planning because it can save you a lot of money. While taxes can be tedious and confusing, it’s important to get it all set up now, because you have to know how to treat your business to get all of the tax advantages -- not to mention, your CPA will love you for it. You can’t wait until the end of the year, making a mad dash to your CPA on April 14th, asking if they can get you out of your tax mess. Speaking of CPA's, I know you don't want to hear this because you're here trying to learn this stuff yourself, but I'm still going to advise you that you should always speak to a CPA and/or attorney to make sure that you're clear on things and so that things are done right. If you're a business or investor, the last thing you want is to mess up your taxes and get audited!

Before getting into the tax calculators, here’s a quick explanation of the different types of LLC business structures how they are taxed, and the types of forms you'll need.

LLC SOLE PROPRIETOR:

Sole Proprietorship goes on personal taxes. It’s considered a disregarded entity for tax purposes. That means everything including the income, losses, and profits will ALL be filed on your personal taxes.

If you’re a Sole Proprietor, you will simply need a Schedule C form to file on your personal taxes on a standard 1040 form. Any business that has paid you $600 or more of the year, should be sending you a 1099-MISC.

LLC PARTNERSHIP:

LLC Partnerships and S-corps are flow through entities. This means, the profit will flow through into your personal taxes.

If you have an LLC Partnership, you will file a 1065 tax form, which is where all of the income, loses, and profits are calculated. Whatever your profit is, will then get divided among partners and will go onto a K-1 form, which will you will file on your personal taxes (1040 form). If you have one of your members actively managing your LLC, you may also have to give a W-2 or 1099-MISC to the manager who will then file onto their 1040 or Schedule C form for their personal taxes.

LLC S-CORP:

S-corps file an 1120S form and each shareholder will get a K-1 form (for interest, capital gains, & dividends), which will then will go on your personal tax 1040 form. The other thing you'll have to do is pay yourself a reasonable salary. Since you'd be paying yourself a salary as an employee, you'd have to keep meticulous record of payroll and taxes withheld. You'd also give yourself and your employees/contractors W-2 forms or 1099 forms, which will then be filed on employee's 1040 and/or Schedule C forms. There's also form 941 that you'll have to file for quarterly employee tax reports, and may have to also make estimated tax payments depending on the amount of taxes owed.

If you want to to be taxed as an S-Corp, you cannot wait until tax season! You will need to know this in advance! Once you decide this is the best option for your business, you will need to file a 2553 form within the first 2 months of the tax year in order to claim S-Corp Status. This is why tax planning is so important!

NOTE: A lot of people wonder if it's more advantageous to do an S-corp or Partnership. This should help clear up a couple of things...

It’s typically more advantageous for LLCs that are more-so below 30k profit range to file as a Partnership, and LLCS that are more so for the 30k and above range to file as an S-corp. This is typically due to the additional administrative work, responsibilities, and additional cost to do taxes with the more complex 1120s forms (which is 47 pages). However, once a business gets into a higher income bracket, that's when it may be worth it to go through the extra motions to save money, because that's when you're more likely to be liable for paying more in taxes. In a nutshell, the higher the income, the more tax liability, the lower the income, the less tax liability. (There's a link at the end of this article that explains advantages and disadvantages of each entity.)

LLC C-CORP:

C-corps file an 1120 form and shareholders will get a 1099-DIV (dividends) form, which will then will go on your personal tax 1040 form. If your C-corp has employees or contractors, you’ll give W-2 forms and/or 1099-MISC, which will then be filed on employee's 1040 and/or Schedule C forms. Like S corps, there's also form 941 that you'll have to file for quarterly employee tax reports as well as make estimated tax payments.

If you are a C-corp, you will be dually taxed, meaning that the business pays corporate tax and that the owner pays taxes on dividends. Typically, this is most beneficial to businesses in the high income brackets with employees who receive benefits.

TOOLS FOR CALCULATING/ESTIMATING LLC TAXES:

There are a few different options and tools that will help you calculate what your taxes will be. See the list below.

1. Quick Reference Charts:

If you’re trying to set up or structure your LLC and figure out the tax liability for your real estate or other businesses, you can get a general idea of what your tax implications and liability will be at the link below.

When you get to the page, there are options on the left side of page:

• How to figure out your tax rate if you’re NOT a C-corp [aka Partnership or S-Corp]
• How to figure out your tax rate if you’re a C-corp

Click on whichever corresponding link that applies to your business: (Click Here to Go see the Table and Figures)

The above site makes it incredibly simple to understand how your tax liability will most likely pan out based on the amount of income your business makes.

2. Tax Form Tool + Instructions:

For those who want to get down to the nitty gritty and cater it specifically to your situation, There is a 1065 Calculator and instructions on how to fill it out at the links below.

GET 1065 CALCULATOR HERE

(VIDEO INSTRUCTIONS ON HOW TO FILL OUT 1065 FORM BELOW)

GET THE 1120 CALCULATOR HERE.

(VIDEO INSTRUCTIONS ON HOW TO FILL OUT 1120 FORM BELOW)

3. Complete Practice Tax Form Page:

Tax Form Calculator has the entire list of IRS forms such as (K1, 1040, Schedule C, Schedule E, etc.) that you can use to estimate/calculate your taxes!! How awesome is that?!


Bonus! 
BENEFITS & DRAWBACKS:
If you want to know the benefits and drawbacks of each tax scenario, such as Partnership, S-Corp, etc. You can get a nearly complete breakdown from InternetLegalAttorney.com


Bonus#2! 
WHERE YOU CAN DO TAXES FOR FREEEE!

• H&R Block's Free File
• 1040.com Free File Edition
• FreeTaxUSA®IRS Free File Edition
• 1040NOW.NET
• eSmart Free File Edition
• TurboTax Free File Program
• Online Taxes at OLT.com
• TaxSlayer
• FreeTax Returns.com
• TaxAct®Free File
• ezTaxReturn.com

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How to Establish an Anonymous LLC for Real-estate & Other Businesses - Step by Step

Haven't been able to get any straight answers about creating an Anonymous LLC? 

I know you feel, and I've got you covered! 

There's a lot of reasons why someone may want their LLC to be anonymous. Maybe a property owner doesn't want the tenant looking them up, or perhaps a business owner doesn't want to be a target for lawsuits.

Establishing an LLC (Limited Liability Company) and filing your Articles of Organization, can feel very intimidating. That's because attorney's typically only give you a few crumbs of info, and when you do finally do a free 30 minute consult with them, they give you so much confusing information and legal jargon, that it makes your head feel like it's going to explode.  I can't say this is all attorneys, but there are attorneys who overcharge small businesses thousands of dollars just for pushing a few papers... and attorney's get all that money because of our fear of doing something wrong or getting sued. This is one of the reasons that small businesses have so many difficulties getting off the ground. But with a little confidence and common sense, you can do most of this on your own. You can do it! (In my Rob Schneider voice.)

So, after several phone consultations with attorneys, quite a few online consultations with some business consultants, 2 weeks/100 hours of online research later, (and a partridge in a pear tree), I found the answer!! 

Now, I'm no legal expert, but I do have common sense and can add 2+2, which completely gives me the credentials to bring you this information ;) (joking) But since I found this awesome discovery, I thought I'd share it with you lovely people! No matter why you want your LLC to be anonymous, I've got the goods below: 

First, despite what most of the attorneys are telling you, there are more than just 4 states where you can register an anonymous LLC. Normally, they say you can only register an anonymous LLC in Delaware, Nevada, Wyoming, & New Mexico. But they're wrong... You can register an anonymous LLC in about half of the states in the U.S. The only downside to not registering your anonymous LLC in the 4 states (they keep beating into your head) is not having as strong of a charging order protection that these states offer, so if charging order protection is what you are seeking, you may want to register your LLC in one of those 4 states. Something new that happened in 2016 is that Ohio is now providing just about the same charging order protection as the other 4 states -- which is certainly worth checking into because there's no annual reports and only a 1 time registration fee of $99 buckages!

Here is the list of states that allow anonymous LLCs.

Secondly, I found 2 incredibly helpful videos that break down how LLCs work, why you need one, and how to structure your LLC anonymously, and why you'd want to make it an anonymous LLC.

Now, here's the scoop:

5 Main Things You Need to Register Your Anonymous LLC

1. Anonymous Street Address: The Secretary of State (SOS) needs a physical street address to your business, so they can deliver mail to it. You can use your business or personal street address, but if you want to remain anonymous, you can get a street address from a mailing service. Just make sure to put it under the name of the LLC. There's a place called iPostal1, which has mail forwarding and virtual mail service in all 50 states. You can also look up a local private mailbox service in your area, which will also give you a much less expensive rate than UPS and some other services. (Side note, the Secretary of State will not accept P.O. Boxes for a business address). 

2. Registered Agent: A reputable place is Northwest Registered Agent who has registered agents in all 50 states and was the most reasonably priced at $125 per year. With Northwest Registered Agent, you can have a Registered Agent available immediately upon signing up and they'll send you everything you need via email. There are many reasons you need an Registered Agent. One reason is because their name (instead of yours) is what will be publicly registered under your LLC at the SOS website. There are several other reasons to have a registered agent, which you can find on the LLC University website.

3. Organizer: Someone other than an LLC member who has zero interest in the company which fills out and files the LLC paperwork with the Secretary of State. (This can all be done online). This can be someone you hire, a trusted and capable friend or relative, or your Registered Agent. You can have a member of the LLC file the paperwork, but that will diminish the anonymity of your LLC.  Side note: your Organizer can use your anonymous business street address as their address since they are doing this on behalf of your business.

4. Operating Agreement: This is an internal agreement between you and your LLC partners or members who have a vested interest in the company. You don't need to submit this in to the Secretary of State unless your state requires it. You just need to have it on file in case the "shit hits the fan". You can get a free template of an operating agreement at the LLC University Website. You can also get another variation of an operating agreement from Northwest Registered Agent. You should have an attorney look over this agreement to make sure it looks legit.

5. Articles of Organization (Secretary of State Registration): Here's a handy list of all 50 states where you can file your SOS registration. The cost to register varies in each state.

Above and beyond the registration, a couple of other things you'll need to do for your LLC are: 

• EIN Number: Get your EIN number from the IRS so that your LLC will be all the way legit. Just make sure to put the EIN under your LLC's name and not your personal name.

• Bank Account: Regardless if you do an anonymous LLC or not, you need to have a bank account in the name of your LLC. so go to your local bank and set up an account for the business. Getting a credit card and establishing business credit can further substantiate your LLC.


• Transfer Ownership: If you own Real Estate, you need to contact your local county auditor to transfer ownership of the property into the name of your LLC. Typically this is done with a quitclaim deed.

• Unique Name Search: Make sure you have a unique name for your LLC business. Basically, you can't use the same name as anyone else. You can do a business name search on your State's Secretary of State website.

Now, one other thing you should do is get liability insurance for your company. Just because you're an LLC doesn't mean you won't get sued. But the LLC does offer many other advantages. If you want to make sure the "Corporate Veil is not Pierced" you'll need to make sure you Maintain your business appropriately. 

There's a lot of options when it comes to structuring an LLC or any kind of business for that matter... and there are so many stipulations, it can be so confusing! I went through hell trying to figure it all out.... but you won't have to, because I will be doing a future post about LLC structuring for the best possible outcome for taxes, asset protection, and legal protection. So stay tuned...


Also, I recommend that you do your own research and cross referencing to ensure that you are doing what's best for your business. What I'm sharing with you is the knowledge I've gained from research and experience... which saves thousands of dollars, but your situation may be different. When in doubt, consult an attorney. Legal Shield has attorneys at your disposal at any time for a mere $40 per month. You can't beat that. If you've had any experience with paying out for attorney consultations, you're aware that you can spend that much in just one visit. 

I have personally used Legalshield, and have been extremely satisfied with the service! You should also know that I'm not receiving any compensation for this referral. It's just a service that I have had a great experience with, and wanted to share it with you so that you can benefit from it too!

I hope this helps to save you from having to go through the frustration that I had to go through to get this information. If this article has saved you time, money, or headache, please share it with your friends! 

Thanks so much for stopping by! Cheers to you and your successful Limited Liability Company!