A business with shareholders is an owner-owned company, which means that whoever owns the shares can decide how to use the company’s money. An individual or a group of individuals who own all the shares are referred to as owners.
In comparison, a corporation where the employer (or employers) has full control over the firm’s funds is not owned by anyone other than the employer(s).
Real estate is typically considered a non-profit organization because it creates opportunities for others through its productive use. This includes things like developing real property and renting those properties to someone else or keeping it for yourself.
That being said, in order to avoid paying employment taxes such as income tax and/or self-employment tax, some businesses choose to get rid of their corporate structure and go back to having shareholders.
This article will discuss why and how you can do this. It will also talk about what kind of formalities must be done in your state so that your business can remain inactive while you prepare to have shareholders, and what documents you need to make sure you have before you take action.
Disclaimer
The content in this page should not be used to determine if getting into the independent contractor status is appropriate for your situation. Independent contractors are not necessarily more expensive employees; they may be less costly depending on your expenses and the type of work you want to offer.
Apply for and obtain a federal business license
While it is not legally required, most state real estate boards require you to be licensed as an agent or broker in your home state before they will accept you into their organization. This is due to regulations set by Congress that each individual state must abide by.
Most states have a board made up of individuals with varying degrees of experience who oversee agents and brokers. By being licensed in your home state, these organizations can verify you are indeed working within regulation and guidelines.
Some states even ask for proof of this license so they know you’re not lying when saying you’re working under contract and licensing laws.
Register your business with the state and local tax office
As mentioned earlier, even if you are not planning to do any direct selling, just registering your business can give you some benefits. This is especially true if your business will be performing enough transactions to require an LLC or corporation. By registering as a business owner, you lower your liability in case something goes wrong!
Most states offer at least one window through which individuals can perform business activity. This includes offering services and doing business under a company name. While this may seem trivial, it can help your business get off the ground more quickly.
By being able to easily start working for yourself without too much red tape, you can begin generating revenue faster. And since most people are familiar with using a company like Amazon when buying products, having a business account makes that easier.
But beyond just starting up a business, these accounts also allow you to update information about your business, add employees, and transfer ownership. All of these things depend on what kind of business you have, but staying within policy requires interacting with the IRS and/or your state’s taxation agency.
Create a company bank account
If you run your business out of your personal savings or credit cards, it can get tricky when you decide to close down your business.
Most lenders require proof that there is an established source of income for a business, so having a separate banking account makes things easier.
By establishing this new company account, you will be able to easily transfer all of the money in the account to your personal savings or debt repayment accounts. Plus, most banks offer business loans which can help with starting up or running a business!
It’s also important to note that many states now ask for shareholder information as part of doing business, so keeping records and receipts organized will make proving ownership easy.
Company directors are typically owners, so making sure everyone who has “ownership” rights over the business is documented will help ensure everything gets transferred properly.
Transfer ownership of your assets to the company
The second way to get rid of your personal property is by transferring it to the business you own. This is called asset sale or liquidation. By and large, this happens at the end of a business’s life when it has nothing left to sell.
When this occurs, the owners of the business will often offer to pay you less for these assets in order to be rid of them. It’s hard to say no to such an offer, especially if you don’t want to go through the hassle of selling these things yourself.
In fact, most experts recommend doing just that – buying lower as “the other side of the coin” from getting money for your assets.
Open a corporate bank account
Even if you do not plan to use your S-Corp as an investor, it is important to have a business checking account. This will help you with several things such as paying bills, keeping records, and running reports.
Most lenders require proof that your business has a banking account. They also look at how much money is in the account and what types of transactions occur.
By having this, you’ll be sure your numbers are accurate! (More about why investing in an S corporation can be tricky next week.) You should choose a small business friendly bank that does not pose too many fees for services.
Something to consider – Companies that offer free banking may not be the best choice because of the additional fees. It depends on your budget and how much business cash you need to access.
Once everything is set up, stay within your company’s limit unless you must make large purchases or carry out major projects.
Transfer all your personal assets to the company
After you have determined that the business needs to be run as a corporation, your next step is to transfer all your non-corporate assets into the new corporate entity. This includes your house, car, bank accounts, etc.!
It’s very important to do this before formally merging the two entities together. By doing so now, you are protecting yourself in case things go horribly wrong after the merger. You also want to make sure you are not taxed twice for the same income or asset.
Once everything has been transferred, file an extension with the IRS. This will give you time to adjust to the changes, and it helps protect you from any potential legal action.
Pay yourself a small salary
As mentioned earlier, one of the biggest reasons why real estate investors get in trouble is because they spend their money faster than they make it. This can quickly turn into a situation where you are running out of money as well as inspiration.
As an owner-broker, your salary will vary seasonally and depending on how much business you have. But however little or big your income may be, there’s always something that you can do to increase it. You can start by offering discounts to clients or others for referrals. Or maybe you could begin accepting lower priced properties so you can focus on finding the better ones.
Whatever you choose to do though, don’t take too many steps towards increasing your income before you implement them. Try out each idea separately first to see if it works before moving onto the next one. That way you won’t lose momentum and end up with nothing!
Getting rid of the debt and opening up a brokerage account is also good ways to boost your income since you’ll have access to more loans and investment opportunities. If you’re already paying off credit cards, keep doing what you’re doing!
There you have it! Some easy tips to help you get real estate out of a c corporation and invest in property on a full time basis.
Pay all your employees through the company
As mentioned earlier, you can pay all of your employees through the company instead of having each individual employee receive payroll benefits from their department or organization at work. This way you save money by not paying for things like retirement benefits, health insurance, etc. for individuals.
By doing this though, you also need to be sure that everything is legal. Make sure you are able to prove employment as well as show who gets paid what. If someone was hired directly, make sure they do not get classified as an independent contractor.
This could potentially put them in a lower income tax bracket than if they were considered an employee. For example, if they determine that person is an employee rather than an independent contractor then they will have to include taxes in their monthly paycheck.
