Page 34 —
COLORADO REAL ESTATE JOURNAL
— August 17-September 6, 2016
Law & Accounting
A
s a Denver area attor-
ney specializing in
helping real estate
investors tackle the tough issues
associated with holding invest-
ments, one of the most common
questions I am asked is how
to best protect clients’ personal
assets as well as the investments
they hold. While adequate insur-
ance is a good start and a criti-
cal piece to any asset protection
plan, there are significant plan-
ning opportunities associated
with using limited liability com-
panies and other business enti-
ties to hold and manage assets.
And while one size rarely fits all,
there are some common threads
associated with real estate that
can assist and inform a savvy
real estate investor to move in
the correct direction.
n
What structure is best?
LLCs. Corporations. Limited
partnerships. Joint ventures. An
investor can easily reel thinking
about the possibilities and what
would be best. I could write an
entire series of articles concern-
ing the different entity types and
their uses, but I’ll just keep it
simple here.
LLCs by and large are easier
to run than corporations and
so are the type of entity that I
most often use when structur-
ing businesses for my clients.
The most poignant example of
the relative difference between
the formality associated with
these two entity types concerns
company meetings. Corpora-
tions have shareholders, a board
of directors, officers, and each
and every group must meet to
discuss company business, vote
and otherwise conduct business
in a very formal manner. LLCs,
on the other hand, are much less
formal. In their simplest form,
instead of the numerous roles
associated with corporations,
LLCs simply have members.
The members of an LLC still
should meet and discuss com-
pany business, but when com-
pared to a corporation there’s
only one meeting necessary
for the members of an LLC. A
corporation, on the other hand,
would require two or three – one
for the shareholders, one for the
board and possibly even one for
the company’s officers.
Using the example above,
it’s easy to see why an LLC
would be the entity of choice for
most inves-
tors. And if
an LLC is run
correctly and
with an eye
toward for-
mality, there
is good case
law to suggest
that an inves-
tor’s personal
assets
will
be protected
from creditors
largely the
same as a cor-
poration (though you should be
wary of single-member LLCs).
n
A word on tax structur-
ing.
So let’s assume that you’ve
agreed with me and decided an
LLC is the way to go. A quick
word on tax structuring for
LLCs: The tax code was written
in 1986 and LLCs were largely
a creature of the early 1990s.
When LLCs came on the scene,
Congress didn’t just rewrite the
tax code. Instead, the IRS cre-
ated regulations that essential-
ly say that the person creating
the LLC can tell the IRS how
they want the LLC to be taxed
(within certain limitations). So a
multimember LLC, for instance,
can be treated as a partnership,
a C-corporation or an S-corpo-
ration.
Now let’s back up for a second
and let me give you a quick
caveat: Everyone’s tax situation
is different and I’m speaking
in broad generalities here. You
should speak to your tax profes-
sional about what would work
best for your particular scenario.
But generally speaking, for rent-
als I would recommend an LLC
taxed as a partnership and for
fix and flips, property manage-
ment, brokerage income, and/
or wholesaling generally, I’d rec-
ommend an LLC taxed as an
S-corporation because the S-elec-
tion can generate significant sav-
ings on self-employment tax.
n
What about an out-of-state
company?
Often new clients
will come in the office for a con-
sultation and they’ve been sold
on the idea that they need an
out-of-state company. They’ve
heard about the advantages of
incorporating or organizing in
a state like Delaware, Nevada
or even Wyoming. And while
it’s true that these jurisdictions
sometimes have more favor-
able laws relating to the amount
of asset protection a business
owner will receive, the real ques-
tion is whether going out of state
when your asset is in state will
afford you any benefits. Without
getting too involved (there is
an entire field of law relating to
the conflicts of laws and what
law will apply in any particular
suit), the basic rule that I share
with my clients is that if you are
doing business in Colorado, and
particularly if you own prop-
erty in Colorado, it’s an almost
sure bet that Colorado law will
apply regardless of which state
your business is formed in. So if
we created the company out of
state, it is more likely than not
that the client would not even
benefit from the beneficial laws
of the other state anyway.
So the investor most likely
won’t benefit from the laws in
the other state. To add insult to
injury, the law in most cases also
will require that the LLC still
register to do business inside
Colorado with the Colorado
Secretary of State, meaning that
the business owner will need to
pay the Colorado Secretary of
State and the other state’s secre-
tary of state on an annual basis.
By the way, did you know that
Nevada’s annual fee for an LLC
is $125 and the business license
is $200? Colorado, on the other
hand, is $10. Nevada’s fee is an
awful lot to pay when it’s very
likely you won’t even benefit
from its laws.
n
Did you pass the check-
up?
If you’re new to investing
or you haven’t started struc-
turing your investments using
business entities, it’s never too
early to start and I recommend
getting started right away. But
if you have already structured
your investments in business
entities, how did your structure
hold up in light of the informa-
tion I’ve shared above? Are you
paying unnecessary secretary of
state fees? Are your entities set
up correctly to help save you
money come tax time? Can you
give your asset protection plan
a clean bill of health? If you’re
just not sure that your struc-
ture passes the check-up, consult
with legal counsel and ensure
your investments are both well-
protected and helping you save
as much money as possible.
s
Peter McFarland
Associate attorney,
Long Law Group LLC,
Denver
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