Incorporate or Not?

5721 Views 10 Replies 6 Participants Last post by tbrunch, Jun 3, 2009

chuhanster

Discussion Starter · May 26, 2009

Hi fellow real estate investors. I am hoping to get some advice in regards to incorporating and for others as well who are thinkin about the same thing. So here it goes....

I recently started looking into setting up a corporation for the various properties I own. Below are some of the links I found useful that provided some of the basics re incorporating and shared some good experiences. I recommend every to read these before setting up a corporation.

http://www.milliondollarjourney.com/rental-properties-to-incorporate-or-not-to-incorporate.htm
http://www.milliondollarjourney.com/private-canadian-corporations-and-taxes-the-basics.htm
http://www.milliondollarjourney.com/should-i-incorporate-my-small-business.htm
http://moneygrubbinglawyer.com/2008/08/06/should-i-incorporate/

After my research so far...in the end the decision to incorporate boils down to your individual situation. So here is mine....

I am 26yrs old. I own 2 rental properties. I live in one house and rent out part of it. The second is a duplex. In addition, I have a personal income of 65K/yr and growing. In 2yrs my personal income alone will be 150-200k/yr. So the income from rental properties is just going to drive my total income higher. Furthermore, I am looking into buying another rental property worth 500K (12unit apartment building)...so I think I am gonna make the tax man very happy unless I incorporate. The properties I have are in Ontario, but the new building I plan to purchase is in New Brunswick.

I haven't talked to a lawyer or an accountant yet because I want to be well prepared before I talk to them.

Given this situation...to me it looks like setting up a corporation would be a wise step especially since my own personal income is very high and I intend to keep buying more properties. I am willing to take the hit on the fees and transfer taxes to transfer everything into a corporation name. But I keep looking for any loop holes.

Any comments/advice would be greatly appreciated....please feel free to share your experiences…Thanks

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FrugalTrader

· #2 · May 27, 2009

Chuhanster, check out this post by QCash, one of our writers:
http://www.milliondollarjourney.com/rental-properties-to-incorporate-or-not-to-incorporate.htm

The issue with holding rental properties witihn a corp is that the passive income is taxed at the highest rate anyways. I personally don't think using a corp for investment property has a lot of value.

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chuhanster

Discussion Starter · #3 · May 28, 2009

Thanks FugalTrader for the informaition. Do you know of any other way around the high tax. I am workin on finding a wife....lol. Cheers.

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geewilickers

· #4 · May 29, 2009 (Edited)

Incorporating is also important for liability reasons, if you should ever get sued the person suing you won't be able to attach your other properties and assets. A friend of mine's uncle had several properties, one day one of the tenants slipped and fell and sued the landlord for a few million and won. The landlord lost all of his properties. Had he incorporated each individual property, the tenant/courts wouldn't have been able to attach his other properties.

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FrugalTrader

· #5 · May 29, 2009

geewilickers said:
Incorporating is also important for liability reasons, if you should ever get sued the person suing you won't be able to attach your other properties and assets. A friend of mine's uncle had several properties, one day one of the tenants slipped and fell and sued the landlord for a few million and won. The landlord lost all of his properties. Had he incorporated each individual property, the tenant/courts wouldn't have been able to attach his other properties.

This is not entirely true. Most banks will require that you personally guarantee the mortgage regardless of if you are behind a corp when it comes to rentals. The key avoiding liability is property insurance!

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tbrunch

· #6 · Jun 1, 2009

Liability protection is a myth.

It is a common practice to sue the corporation AND the director of the corporation (for neglijence). In small businesses the owner is the sole director. When sued, the director is on the hook with all his assets.

geewilickers, your friend would have lost his shirt anyway if he was sole director and took care of property personally. A slippery driveway is due to neglijence which can be attributed to the director of the business.

Plus, a good lawyer will try to find ways of piercing the "corporate weil," if successfull the whole corporate protection is gone.

As FrugalTrader says, you may be better off buying insurance on your name.

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canehdianman

· #7 · Jun 2, 2009

tbrunch said:
Liability protection is a myth.

It is a common practice to sue the corporation AND the director of the corporation (for neglijence). In small businesses the owner is the sole director. When sued, the director is on the hook with all his assets.

geewilickers, your friend would have lost his shirt anyway if he was sole director and took care of property personally. A slippery driveway is due to neglijence which can be attributed to the director of the business.

Plus, a good lawyer will try to find ways of piercing the "corporate weil," if successfull the whole corporate protection is gone.

As FrugalTrader says, you may be better off buying insurance on your name.

I can't even decide where to begin on the incorrect information in here.

Incorporation can do a LOT to protect your personal assets. Courts rarely pierce the corporate veil unless it perceives fraudulent activity (incorporating to protect your assets is not fraudulent).

Also, a director should be indemnified by the corporation for his actions (except gross negligence, which a 'slip and fall' would not constitute).

None of the above should be construed as legal advice.

I would recommend you talk to a lawyer regarding your incorporation. It will likely be a good idea to do so (and fairly inexpensive as well).

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geewilickers

· #8 · Jun 3, 2009 (Edited)

FrugalTrader said:
This is not entirely true. Most banks will require that you personally guarantee the mortgage regardless of if you are behind a corp when it comes to rentals. The key avoiding liability is property insurance!

I wasn't referring to mortgage liability, I was referring to legal liability.

tbrunch said:
Liability protection is a myth.

It is a common practice to sue the corporation AND the director of the corporation (for neglijence). In small businesses the owner is the sole director. When sued, the director is on the hook with all his assets.

geewilickers, your friend would have lost his shirt anyway if he was sole director and took care of property personally. A slippery driveway is due to neglijence which can be attributed to the director of the business.

Plus, a good lawyer will try to find ways of piercing the "corporate weil," if successfull the whole corporate protection is gone.

As FrugalTrader says, you may be better off buying insurance on your name.

I'm sorry but this information is WAY too false. The whole point of the corporation (AKA LLC) is that it's limited liability. In the event you get sued, it's the corporation that loses assets, not the employees, regardless if you're director or not. Rarely have I seen directors being prosecuted, unless it's a criminal offense.. Someone slipping is not a criminal offense.

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tbrunch

· #9 · Jun 3, 2009

canehdianman

"None of the above should be construed as legal advice." I agree with you. Nothing in this forum should be construed as legal advice. This applies to your post too.

"a director should be indemnified by the corporation for his actions". We are talking about a small business with a sole director. When the corporation's assets are exhausted, how is the corporation able to idemnify the director. Does this make any sense to you?

"I would recommend you talk to a lawyer regarding your incorporation." I agree with you. Strongly recommended.

geewilickers

"Rarely have I seen directors being prosecuted, unless it's a criminal offense" Should we assume that you have actually seen a lot of cases? Are you a lawyer?

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stephenheath

· #10 · Jun 3, 2009

for neglijence

Negligence

piercing the "corporate weil,"

Corporate Veil

Kinda hard to take any legal advice seriously from someone who doesn't even know the terms, but then you should NEVER EVER take legal advice from the net... always pay a lawyer, then sue the **** out of him if he's wrong.

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tbrunch

· #11 · Jun 3, 2009 (Edited)

stephenheath

Thank you for correcting my English spelling. The fact that I spelled the terms wrong does not mean I do not understand them.

Judging by the replies to my post it is obvious that people understood what I was referring when I said "weil" instead of veil.

Great contribution to this post, pointing grammar errors. This is in line with your contribution to other threads: nothing of substance, useless generalities and a load of crap.

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