An easy way to transfer your real estate business out of an S-corp is to purchase a LLC, run it as separate business property, then have the new company be a shareholder in the old company’s stock.
Calculate your liquid net worth
Now that you have determined what kind of business structure you want to use, you will need to calculate your liquid net worth. This is also known as net profit or net income. Net liquid wealth includes all liquid assets (such as savings accounts, house money) plus the yearly earnings from your business.
It can be tricky to determine how much revenue your business has made in past years so it is best to average out this information. For example, if your business had $5,000 per month for one year and then only $2,500 per month for the next year, then we could say that your monthly gross revenues are $3,500 which is an average.
By adding up these averages and subtracting our initial cost, we can arrive at our final net liquid asset value. In this case, it would be $50,000!
This seems like a lot, but most likely not very practical unless you own a restaurant or run a luxury service such as hair styling or massage. If you do not expect to earn enough to spend more than half of your overall net worth on a single habit, then you may be able to go professional with your business.
If you decide to take this route however, you should still consider setting up an LLC instead of an LLP because they are priced about the same and give you similar benefits. Both require you to list yourself as an individual owner, but otherwise work similarly.
Calculate your debt to net worth ratio
The next step in the process is calculating your debt to net worth ratio. This can be tricky, as not all loans are included when calculating net wealth. For example, credit card debts typically do not count towards this number because they don’t represent real estate that you own.
Many people include their mortgage in their net worth, but this isn’t entirely correct. Your home doesn’t increase your net wealth unless you actually have access to it, which usually means you must have clear title to it. If you don’t, then including your house in your net worth can be misleading.
By excluding mortgages from our net wealth calculation, we lose sight of the fact that many wealthy individuals were once heavily indebted. By understanding how much debt someone has compared to their assets, we can get some insights into whether or not they owned their home outright.
Is your S-Corp compliant with the IRS?
The next step in transferring your business is making sure that you are not violating any rules or regulations when it comes to your S-Corporation. This article will go into more detail about some things most small business owners are unaware of when it comes to corporations.
It’s very important that you don’t forget these steps, otherwise, you could face stiff fines or even prison time!
Before you begin the process of liquidating your shares, make sure your S-corp is current by reviewing our list here.
Calculate your liquid asset value
The next step in transferring real estate out of an LLC or S-corporation is calculating your net liquid asset value. This is also referred to as total cash liquidity, net working capital, or net tangible assets.
Net liquid asset values are calculated by taking all current money assets (dollars) and subtracting all debt obligations. Net liquid asset values are typically reported as a percentage of equity. For example, if you have $5,000 in personal savings and no credit card debts, then your net liquid asset value would be 20% ($5,000 divided by $20,000).
Most experts suggest keeping at least 10%-15% of equity available for withdrawal. This means that if your business has $250,000 in market value, then it should maintain $25,000-$37,500 in net liquid asset value.
Calculate your liquid asset balance
The next step in transferring assets out of this business is calculating your liquid asset balance. Liquid assets are those you can access quickly, without too much effort or restriction.
Many individuals have a misconception about what constitutes a liquid asset. Many think that checking accounts qualify as a liquid asset. However, this isn’t necessarily the case.
A personal check account doesn’t make up for half of your liquid asset balance. You need to include all sources of money you control in your calculation. These could include:
Banks will generally consider monthly savings between $1,000 and $2,500 to be accessible within one day. Anything more than that requires an additional day to get it spent, which makes it a non-liquid asset.
Most people also believe that owning a house is a major liquid asset. But according to Forbes, only 5% of Americans own their home free and clear. This means that 95% must either pay off debt with a mortgage or sell their current residence to do so!
Businesses lose thousands of dollars each year due to lack of liquidity. What if you don’t want to leave your job though? There are ways to achieve financial freedom even when you’re not ready to grow into the next level of leadership yet. Read on to learn how to transfer real estate out of s-corp.
Create a transfer agreement
A transfer agreement is one of the most important documents you will create as an owner of your business. This document states how, when, and/or by whom your company transfers or distributes its assets.
It also covers what happens to these assets after it dies (assets include real estate, cars, bank accounts, etc.). Make sure everything about your business is documented, because in case of death, someone must know what things are!
There is some legal requirement that mandates this. For example, if there is still money left in your account after your passing, then the heirs must be notified so they can claim those funds.
Prepare your transfer agreement
When you are ready to transition out as an owner, there is one more step that must be done! You will need to create an internal company document called a transfer agreement.
This document is very important because it defines who gets what when the business transfers or closes down. It also covers all of the assets and liabilities of the business. This includes things like the property being sold, any equipment or furniture used in the business, and any loans or credit cards carried by the business.
The transfer agreement should have something in it for each member of the organization (shareholder, officers, etc) as well as anyone else with rights to financial documents or information. Make sure everything is documented here!
Keep in mind that if someone has a right to see this document, they can review it before it is finalized. Sometimes people forget to ask for access until after the sale, which can lead to legal issues later on.
Notify the IRS
It is important to let your accountant know that you are shutting down your business, as well as informing your tax agency of this change.
This includes notifying both the Internal Revenue Service (IRS) and your state taxing authority. You can do this via phone or in person, but make sure they have all the appropriate paperwork!
It’s also worth noting that many small businesses run an online store as part of their business. If this is the case for yours, it’s definitely okay to close out these accounts before shutdown day.
By removing all access, customers will be unable to log into your website and place orders. This way, nobody gets hurt if you don’t feel like doing business with them after everything has been said and done.