do i need to form a corp to buy tax liens?

Comments(2)

• 
  DariusBarazandeh13th June, 2002

  That's a great question! Really you don't need to form a corporation to purchase tax liens but there are some very practical reasons for forming a business entity. For example:
  
  1) To limit your personal liability from legal issues and problems of the business. This allows the business to take a hit if creditors, litigation-hungry individuals get involved. The main thing is that you want to use the business entity to shield your personal assets from bieng liable in a lawsuit. Of course you must fullfilll all the requirements of your state regarding your corporate status. If you do not then creditors could 'pierce the corporate veil', as attorney's say, and go after your assets.
  
  2) Another reason is to provide a method to divide up ownership and liability amoung the partners or officers of the entity.
  
  
  3) There are strong reasons to form an entity to take advantage of business tax breaks. These are ONLY allowed if you are a business entity. These include health insurance, pension plans and profit distributions which may not be subject to self employment taxes. Some fringe benefits may also be included.
  
  So which do you use? Here is an overview of the business entities generally available:
  
  C Corporations
  Advantages -
  - limited liability,
  - shareholders efficiencty managed
  - Owners can receive all legal employee benefits, and have tax deduction benefits to the corporation.
  
  Issues -
  -Profits are taxed at the corporate level, then dividends or profits are taxed to the shareholders, resulting in double taxation of profits.
  - Alot of reporting (required annual reporting to the state, shareholders, director meetings, etc.)
  
  PSC Corporations
  "PSC" means personal service corporations.
  - Very similar to C corporation, but with its own special tax rate.
  - Created for professionals and individuals involved in the sale of personal services, versus products or non personal servies.
  
  Sub S Corporations
  ELIMINATES DOUBLE TAXATION - The double taxation problem of the C corporation is eliminated:
  - taxes on profits are paid only at the shareholder level. This is why the tax code refers to them as "pass through" entity, meaning that tax liabilities pass to the shareholders.
  
  Some disadvantages
  - required annual reporting to the state and annual formalities such as shareholder and directors' meetings, etc. Simliar to the C-corp.
  
  Limited Liability Companies (LLC)
  The LLC is allowed to have partnership tax classification when there are at least two members. This makes it a pass thru entity for tax purposes.
  
  Partnerships
  Partnerships fall into two categories, general and limited. General partnerships have no limited liability for any partner. Limited partnerships have limited liability for the limited partners but not for the general partner (the controlling or operating partner or partners.
  
  I hope this gives you some idea of what is out there. I have seen alot of investors use S-corps. and limited partnerships. You should research this topic and talk with an expert to figure out what is best for your needs.
  
  Regardless of how many deals you plan on doing I would not do any in your own name. That is creating additional personal liability for yourself.
  
  Best of Luck!

• 
  rajwarrior15th March, 2004

  Let's break Darius's answer down to real world stuff.
  
  1) To limit your personal liability from legal issues and problems of the business. This allows the business to take a hit if creditors, litigation-hungry individuals get involved.
  Liability insurance protects you from liability lawsuits, and you'll need it whether you're incorp'ed or not. The first line of defense from lawsuits is to be an ethical investor and limit your reasons for someone to sue you in the first place. What an entity does is separate your personal assets from business assets in case of a successful lawsuit against the business. If you have little to no personal assets/wealth, (a house financed to the hilt is NOT an asset in the courts eyes) what exactly are you trying to protect? Two things greatly limit this "shield" anyway. First, most don't keep the entity's paperwork up properly, thus allowing the "piercing" mentioned above, and two, most times, the investor is personally responsible for the reason of the lawsuit, thus they can be sued personally.
  
  2) Another reason is to provide a method to divide up ownership and liability amoung the partners or officers of the entity.
  If there is no multiple owners/partners then this is not an issue. At the beginning, a simple partnership agreement would more than suffice for this and be quite a bit cheaper on the pocketbook. To separate business expenses from personal, keep separate checking accounts, which you'll need either way (entity or not).
  
  3) There are strong reasons to form an entity to take advantage of business tax breaks. These are ONLY allowed if you are a business entity.
  The benefits of tax breaks only start to occur when a business is making over a certain dollar amount (check with your tax advisor). Hardly a possibility if the "business" hasn't even did a deal yet. Self-employed people get a flat rate deduction for insurance now, and pension plans and "profit distributions" are likely a ways off for a starting business.
  
  Why would you spend the money and time to start and maintain a business entity in a profession that you are still learning about, haven't done anything in yet, don't know if you really ever will, don't know if you'll be any good at if you do, and don't yet know if you'll even like doing it?
  
  Roger