paying yourself rent

[srhaz]

What is the best way of doing your books?

I currently have a mat that has a lease.
It's in my name (sole proprietor).

Now I am purchasing a 2nd mat which includes the building/real estate.
I would like to avoid incorporating to keep things simple.

What are the ways you shift money around? and why? and the methods to protect your different assets?

I hear things about the real estate in one name and the business in another - and paying yourself rent - and paying off the equipment loan first.
I never understood the paying yourself rent thing. If your left hand gives money to your right hand - Left expenses it and Right declares it as income I would think it equals out.

I want your hands on input first before I find a accountant.

[Anonymous]

First things first - get a good lawyer and accountant, you may think you are being smart and saving money without - but you are probably making a big mistake. They will tell you what to do.

My opinion is you are crazy to own either in your own name. The building should probably be an LLC and the mat a Corp - but get legal advice. There are tax advantages here, it is not as simple as just moving money from the left pocket to the right.

[mike]

A good accountant is worth his weight in gold. (lawyers I'm not so sure :-)

Of course YOU should be aware of all of your local possibilities (state and municipal taxes etc.)

I understand you want input in addition to your professional's, but you may be comparing apples and oranges using other areas.

The system in Canada is, you work all the freakin' hours there are, and at the end of it all you don't have quite enough to live on.

That answer may not provide useful advice, but it let's me vent !

[JSVLaundry]

I own a construction company (a corp.) with my father in a building that my father owns personally. My father is the president, of the company & I am the VP. He pays himself rent every month for the rental space of the company.

There are not just an income on one side and an expnse on th eother to balance them out. There are two incomes & 1 expense this way. He is making a monthly income on the rent and a weekly salary/yearly profit income from the company. The company hs the expense of the rent payment.

As Kirby said, the only thing to remember, in today's times, that if you are to buy a building, or any real estate for that matter, is to create an LLC fo the real estate. This is ONE entity. Then you create a corporation for the business. This is a seperate entity.

You just have to visualize yourself being 2 different people. A landlord and a tenant.

Vinny

PS - more money spent now for preparation will save you 10 times more in the long run.

[CharlieS]

There's even a better reason. You want to maximize your rental income to the greatest reasonable amount, and minimize the laundry income.

Why? Because you won't pay self employment tax on the rental income, and you will on the laundromat.

Of course, if you are maxing out the SE tax anyway, its not a consideration.

Charlie

[srhaz]

Great point Charlie-

It is interesting that I can make a million dollars on my rental property and not pay any self employment tax.
But if I make one dollar on my business.....there it goes.

All your points are well taken.

Any other tips on forming the LLC & Corporation?
Otherwise I'll follow my accountant words.

[Anonymous]

Can anyone explain the real difference between LLC and Corporation?

I understand LLC is formed to protect individual's personal assets; homes, cars, etc. LLC is taxed conventionally, gross revenue minus expenses equals taxable income. No fancy tricks or tax deductions. No fancy tax filings either. This is what I've recently done with my small Mat business, in which I also own the building, which is in my own name. (Just so I know my personal assets are protected in court.) I look at it this way, if something were to happen in a lawsuit, god forbid, they can have the damn small business, but everything else I have worked for is protected!

Now, Corporation is much more involved tax structure, etc. I see LLC filing as simple asset protection for a small business man such as myself.

Any comments?

[Anonymous]

Tax and accounting treatment of an LLC and an S-corp are very similar. They are both pass-thru entities. With an S-corp income must pass-thru based on percentage ownership, thus if you own 30% of an S-corp you get 30% of the income or loss. With an LLC this does not apply, its based on how you write the rules. Thus, with an LLC a 10% owner could get 72% of the income if you so desire. An LLC can be thought of as a partnership with the liability protection of a corporation in most states. I am not a lawyer, check with your lawyer for a full and probably more accurate analysis.

[gregpack]

Liabilty protection through both LLCs and Corporations is limited if you manage the facility.

Is someone has a slip and fall, the plaintiff's attorney can sue both the Corporation operating the store, possibly the LLC that owns it ,the manager, even the attendant. Whoever has the deep pockets ....

I saw an interesting article the other day. Do you guys remember that fire at a nightclub in the northeast a few months back? One of the plaintiffs is trying to sue the Shell Corporation. They claim that opeartors of a c-store, one of Shell's franchisors, gave away some tickets to that event as a promotion.

The corporate veil may work if you are in a passive role, but nothing will make you sleep as good as a good liability insurance policy.

[Gary C]

I will stick with the dba untill my accountant says it's better tax wise to go s-corp. I can recieve rent from the biz at that time and it will not be subject to self employment tax. ( i own the building ) and if it works out I will rent the eqipment to the biz too. That depends on the accountant.

Gary

[Sean326]

You can add annother dimension too, estate planning.

I got into the mat business through my real estate business. my mat pays rent to my building and each is a separate company.

additionally all my companies are owned by a holding company that my kids have 98% ownership of as limited parters (no votes)
My wife and i own 2% (all the voting shares). When my wife and i die the kids already own 98% of everything.

Additionally my wife and i alternate in individually owning entities (the mat and 11 buildings) it makes it harder to pierce the corprate veil and attach joint personal property like our homes.

[Gary C]

Sean326, What happens if some sues one of your kids and wins for a very large amount? Do they have so sell the shares in the holding co.? If that is the case would you just buy the shares from them? I am assumming a verdict that was higher than insurance would cover.

Gary

[Sean326]

Gary,

I guess anything is possible, you just have to make it harder for the lawyers to get at your holdings.

I'm not sure that putting an 8 or 12 year old on the stand as a defendant is going to garner much support from the average jury.

I do have individual insurance on each of the entities of 1 million.

Then I have a blanket policy of 5 million as a catch all.
(remember the lady who got 7 million for spilling coffee on herself at McDonalds)

As my lawyers and accountants have explained to me you cannot inoculate yourself against lawsuits but you can make it unbelievably difficult to pursue.

Most of my tenants and customers in my mat who would want to sue me are going to have to hire a lawyer on a contingency basis. Most lawyers who work on contingency basis are looking for the easy quick buck. No one who looked at my layers of corprate and trust structure and layers of insurance would see anything but a multi year nightmare battle ahead of them with no assurance of victory.

Lets face it with very few exceptions most mat customers
(and my tenants) are not independantly wealthy and could never afford to retain and support a lawyer for a protracted suit out of their own pocket.

But all this is a second line of defence

The first line of defense is run your business well enough so no one has any reason to sue you.

But you must plan to deal with the scumball who see suing someone as cheaper than buying a lottery ticket.

[Rondo]

Just a thought... the more insurance coverage, 1 million verses 5 - 10 milliuon. the more likely a Laywer will gamble to take a case. The first thing that they look at is the potential $s.

[Sean326]

Rondo, good logic but.....

1, You have to consider what you are trying to protect with your insurance. 5 million is more than my accountant thinks I need but less than my lawyer would like. (these guys never agree but both mean well)

My day job is Director of Retail Leasing for a very large regional developer (PA, NJ, DE.) years ago 1 million was more than enough for our strip center tenants, today the minimum insurance level that we require before we will consider leasing is 3 million.

the three million is just one store, most of these stores are chains that have blanket policies of tens to hundreds of millions chain wide.

2, the more insurance I have, the more risk (at stake) the insurance company has, the harder the insurance company will work to defend it. also the more insurance I have the less likely a suit will overflow the insurance limit and affect me personnally.

[Rondo]

A personal insurance claims adjuster suggested a while back that I do the Umbrella thing a few yaers back.

Question:

1. Do you use a seperate ins. co for the Umbrella? (to keep it secret from the lawyers) Only a real good one might find it.

2. Is it in your name or one of your companies.

I would think that a personal 5 million policy would be best to portect your personal assets, seperate from any companies you own and to hide it from the lawyers as a last resort for your protection.

[Sean326]

Rondo,

I'll e-mail you, I am happy to discuss what I do verbally with a few fellow mat owner but I'm nervous about putting too many written details out in public.

Don't want to test my umbrella policy in case someone sues me for bad advice.

[Anonymous]

Sean, that is probably a good idea. I started a post earlier today listing my business liability amount and then my personal umbrella and then decided that it probably would be better not to put that information up on a public forum. There are some things that are better left unsaid.

[Anonymous]

Never give people ideas.

[Kitty]

What the hell you think we are doing here? :)

Ultimately the idea of the forum is to help and educate other store owners or potential owners, however, anyone stupid enough to spill more beans than necessary is careless.

Giving out too personal or confidential info is not a good business tactic, however ideas are what is passed along these pages and greatly appreciated by many.

[Anonymous]

I was refering in agreement to Kirbys post about not giving out too much personal info.

[CharlieS]

Only give out what you are comfortable with the entire world knowing.


The strategy of a family holding company/trust is fairly sound. Usually, a creditor can take the interest of a particular partner, but gains no more power or interest in the corporation/trust than that partner had the legal power to exercise. Generally, they will not have the power to force any cash distributions or to force a partition sale of the trust/company - unless the original debtor whose asset they gained, already had the power. The result is that a well organized trust or corporation provides protection to the other partners, and generally offers no real value to the creditor, who just gets frozen out unless the controlling partners agree, which they won't.

Of course, this is all attorney stuff. Seans approach, however, is very sound.

Finally, the umbrella generally is always from the underlying insurer. They may themselves reinsure with other carriers, but most underwriters will only place umbrellas over top of their own coverage.

Charlie

Charlie

[Anonymous]

Everything said is true, except the umbrella. I have one company for the business with business liability and an additional personal umbrella from another company - if they went after me in conjunction with the business both companies would be on the hook.

[Rondo]

And that answers my question. it can be done with a seperate company.