I currently own 6 rental properties. My question is that I want to start a corporation to build business credit, but I do not know what style of corporation to have. The idea behind this is that I want to buy real estate under a corporate name and no longer use my personal credit.
The answer to this question depends on several factors. First, do you own these properties yourself? This is important because single owner LLCs are no longer allowed in California. The next consideration -- and perhaps the most important -- is what is best for you based on your personal financial situation. At our firm we work with our clients' tax advisors to determine what type of business entity, if any, is best for the client.
While it is a good idea to keep business ventures separate so that your own personal assets are not at risk, this is often easier said than done. Nowadays lenders will ask you to personally guarantee loans and corporate credit cannot be built over night. Often it takes nearly a decade for a corporation to be able to secure credit in its own name but the only way to make this happen is to get it started.
IMPORTANT NOTE: These materials have been prepared by Adina T. Stern, A Professional Law Corporation for informational purposes only and are not intended as legal advice. The information available in this answer is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The information on legal issues available here is not a substitute for legal advice from an attorney who is familiar with all of the facts surrounding your particular situation who is licensed in the appropriate jurisdiction. This answer does not create an attorney-client relationship.
Your best bet is to form an LLC. Many investors choose to form an LLC for each property so that if one property goes bad it does not impact all the others.
The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change. Attorney is licensed to practice law only in the State of California. Responses are based solely on California law unless stated otherwise.
The reason that the previous attorneys recommended creation of an LLC instead of a corporation is because LLC is better from the accounting standpoint when there is a mortgage on the real property. If you have a mortgage and you create a corporation, you may lose some financial advantages vs. if you create an LLC.
If you do not have any mortgage or you desire to create a corporation anyway, the corporation may be either "C" or "S", which basically means that the corporation either pays taxes on its own or "passes through" its income to you and you show the income on your personal tax returns and pay taxes individually. Whether you would want to create a "C" or "S" corporation will depend mostly on your personal income from other sources (i.e., your income tax bracket) and on the corporate income (i.e., who would pay less taxes, corporation or you personally).
In any way, go to the attorney instead of trying to create a new entity for real estate holding purposes by yourself, and the attorney will be able to give you a clear guidance on the choice of entity depending on the totality of your circumstances. Many attorneys do not charge for the initial consultation regarding the choice of business entity.
Forming an LLC or Subchapter S corporation may be a good idea to build business credit. However, if your intention is to transfer properties that are subject to mortgage loans to the newly created entity, you may trigger a due-on-sale provision in the promissory note(s). The due-on-sale provision usually mandates the acceleration of the mortgage loan if title is transferred from the original borrower. While it is not likely the lender will accelerate the loan, it may have the contractual ability to do so.
In planning for your choice of entity and the legal ramifications of incorporating, I recommend you retain an attorney in your area whose practice involves both real estate and business law. Best of luck.
The information above is not legal advice and should not be relied upon for any reason whatsoever. Furthermore, this information does not establish an attorney-client relationship.
An S corporation does not pay federal income taxes, instead passing its income, losses, deductions, and credits through to its shareholders.
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