I just sent off a lengthy email to an acquaintance of mine because, well...I'm a sweetheart. What can I say?! (You knew that already, though, right?)
First of all, what was this email about and why should you care?
Well, this guy is actually Ronnie's cousin who retired out from the Detroit P.D. a little more than a year ago and, after being a cop all of his life, he has exactly zero knowledge of how to start a business and he asked for my help.
So, I painstakingly put together an email detailing exactly how to start a corporation structure in the state of Michigan.
Then, after clicking the "send" button, I'm like...why not share this kick-ass information with my students who probably don't know how to set up their own corporate structure? Especially since there are a couple of things you need to know about which structure to go with and why.
So, let me break it down to you, folks. By the time you're done with this email, you'll be your own little corporate-structure-building expert.
First off, let me lay out a few different entities and why/how you select what you'll use:
1) C Corporation: most people don't know it but when they form a for-profit corporation(which is what you'll always form unless you are going for "non-profit" which is way out of my wheelhouse of expertise) it always starts out, from birth, as a "C" corporation. Always. No exceptions. You have to actually change the designation of your corporation to an "S" through the IRS (after the "birth" of your entity). I'll show you how to do that shortly. But...what's the deal with a "C" corporation and why not just keep it that way? With a "C" corporation, you get what's called "double taxed." So, if your C corporation made a profit (after all write-offs) of, say, $1,000,000 for your designated tax year, you'll have to pay $113,900 plus an additional 34% on the profits over $335,000. And that just plain sucks. Then, you'll get what's "left over" after the IRS is done raping and pillaging you financially and then you have to pay personal taxes on what's left over. (Now do you understand why it's called "double" taxation?) Why do this at all when you can designate your corporation to an "S" and then that $1,000,000 profit (or whatever your profits are) "flow down" to you personally. Then you pay taxes on those profits at whatever your personal tax bracket is. An S corporation doesn't pay taxes; you personally pay taxes on all the profits. The only benefit of a C corporation is that you can choose the month your fiscal year ends. If you want it to end on June 30th, it ends on June 30th. You cannot do this with an S corporation or LLC (which both end on December 31st of each year).
2) S Corporation: unless you have a partner (which I don't recommend because I have personal "issues" with the idea of partners), you need to always set up an S corporation (unless it's for a piece of real estate). If you don't already have an S corporation, get one. This will act as your "umbrella" for everything else you do, can be one of your "partners" in your real estate LLCs (and you are the other "partner"), and this is used as a tool to build business credit. As explained above, you personally get taxed on the "flow down" of all the profits from your corporation through a form called a K-1 which is generated when you do your taxes. You may or may not know this but all tax filings for S corporations and LLCs are due one month before personal taxes are due; they are due March 15th. And as already explained, your tax year for an S corporation (and LLC) ends on December 31st.
3) LLC: this is the structure that's recommended for any partnership (where you actually have 2 people such as a husband-wife team, etc.) and for real estate. The IRS stopped recognizing a "single-member" LLC about 4 or 5 years ago so even though a specific state may let you form a single-member LLC, the IRS simply will not recognize "single member" status anymore. And I don't know about you but I like following the federal rules over the state rules just because the feds trump the state in most (or all) cases. I also don't know about you but I hate getting letters from the IRS that says I'm doing something wrong and need to "correct" the situation. (Been there, done that with the "single-member" thing and the IRS.)
Now, something personal: because I don't really believe in "partnerships" (because I've had 3 failed marriages), I don't believe in going in on anything with someone else UNLESSthere's a damn good reason for it. I've gotten burned on too many "partnerships" (marital and otherwise) to have a very strong view on this. So, if you want to get involved in a partnership simply because you have a spouse, don't do it. Please. Otherwise this just complicates things.
Reasons to actually do a partnership: very simple, you need something of value from the partner in the deal whether it be cash, credit, knowledge, management, or something. This "something" better be of high value.
It pains me when couples want to be "cute" and go in on a deal together when one doesn't need the other to make the deal work (i.e. cash, credit, knowledge, management or something). Not only do you cut in half your power (especially if both have good credit), but if there are problems in the relationship later, it's a bitch trying to separate all this stuff out and you'll end up losing a lot of money. Guaranteed.
What did I mean about cutting your power in half?
Well, if a husband has a 730 FICO and the wife has a 790 FICO, you BOTH have to go on the loan if you are part of an LLC or partnership. If you are getting recourse loans (or properties requiring loans under a million in loan size), you will "hit a wall" at the same time at about 7 properties. If you would have done it the "smart" way, each of you would have gotten 7 properties ALONE and thus, a total of 14 properties between both of you before "hitting the wall."
And by getting 14 cash flowing properties, depending on what you bought and where, you'd be looking at $15,000 to $30,000 a month in cash flow (instead of HALF that because you both "hit the wall" together by being all "cute" when going on all the loans together).
If your credit sucks, or your spouse's credit sucks, start freaking fixing it already. (More on how to make that work in a couple of weeks if you haven't figured that out yet.) It's not that hard. Really, it's not!
Okay, back to our corporations...
You will need one to start which will be your umbrella corporation. This is the one that you'll be doing 2 very critical things with:
1) Building business credit
2) Using as your "partner" on your real estate property LLCs
This umbrella should be an S corporation and should be in your home state. If you don't have one, form it now. Today. While you can still get one with a 2014 year. (This is critical when building business credit for "seasoning" purposes.)
Here's how I detailed the process out for Caesar, Ronnie's cousin who, I may add, is in Michigan but I suggest you read through it, especially for the details on the EIN with the IRS which applies to EVERYONE, no matter WHERE you are forming your corporation!
Remember, your umbrella corporation should be in your home state but I just wanted to demonstrate the steps I laid out for him on how to do this.
Michigan link to for a for-profit corporation:
The form is self explanatory.
Article I: Name that you want your corporation to be. I recommend putting an "Inc." after the name you are seeking since it's short and sweet. Other acceptable extensions can be "Ltd." or "Incorporated" spelled out or "Limited" spelled out or "Corp." or "Corporation" spelled out. You can choose your own extension but you CANNOT use "LLC" since we're not setting up this entity that way. Please note that when you choose a lengthy extension such as spelling out "Corporation," you will be stuck using that entire extension on every document you use which just makes writing it out more tedious and time-consuming.
Article II: Under purpose, you'll have to designate what you plan on doing with the corporation. No need for a lengthy paragraph. Just describe it in a few words and indicate that you'll be providing "consulting" as opposed to selling products.
Article III: When you get to the section on page 1 (in the middle) under Article III where it says number of shares, don't let this throw you. Here's what you put:
Common Shares: 100
Preferred Shares: 0 (or leave blank)
And leave the 2nd part in that same box (#2) blank for statement of relative rights.
Article IV: This is the part where it would be helpful if you had your street address from The UPS Store or somewhere that has mail boxes. Use the same address for all 3 entries and try not to use your home address, as it exposes where you live publically.
Article V: (Page 2) Put your name and then your business address on one line. Leave the rest blank. Don't add any more people.
On the 3rd page, leave the top portion blank. About 2/3 down the page, put today's date. When you print out the form for mailing, you'll sign on the first line under the date.
On the 4th page at the top, put your full name as the preparer and again as the person remitting the fees. Put your cell # as your business phone number.
At the bottom of the same page, type in $50.00 for the organizational fee. There's already a $10.00 fee under that. Then add them together for $60.00 which is what you'll be writing them a check for.
Print out the form and mail it with the $60.00 to:
Michigan Department of Licensing and Regulatory Affairs
Corporations, Securities & Commercial Licensing Bureau
P.O. Box 30054
Lansing, MI 48909
DON'T FORGET TO SIGN THE BOTTOM OF PAGE 4.
Once you do all that, wait the 2 weeks to get the paperwork back. Don't waste your money on express service or anything. Michigan is pretty fast in processing paperwork. It takes me 2 weeks to get it out here in California so you'll probably get something back in a week. Keep a file for all your corporate paperwork!
The second you get the paperwork, go to this IRS link:
NOTE: PLEASE FILL THIS OUT WHEN SITTING AT A DESKTOP OR LAPTOP WITH A PRINTER ATTACHED, AS YOU WILL NEED TO PRINT OUT YOUR EIN WHEN YOU THE SYSTEM KICKS IT OUT TO YOU WHICH HAPPENS THE MOMENT YOU SUBMIT YOUR ONLINE APPLICATION.
Once you complete this step, you can go to the bank with your corporate documents and open up a business bank account. I suggest using Bank of America but that's just my personal preference, as most other banks I've used really suck.
The moment you get your EIN, fill out this IRS form and then fax or mail it off the same day:
For Form 2553, this is to take you from a C corporation to an S corporation:
The first part is self explanatory. Where it gets confusing is at Part E. Put the date that is stamped on the Michigan corporation paperwork. Under F, check the FIRST box only. DO NOT check the box for G. Under H, put your name and cell number. Nobody ever calls so don't worry. Leave the rest of page 1 blank, put yourself as "CEO" as your title ALWAYS on ALL paperwork for everything from now on.
On page 2, just fill in your name, the date, put "100" for % of ownership, date corporation was formed (as per MI paperwork), your SS#, and then put 12/31 in the last box. All S corporations and LLCs end on the last day of the year. Leave the rest of page 2 blank (but make sure you SIGN pages 1 and 2 once you print them out).
On page 3, under Part O, check the first box only. Under P, check the first box for "natural" tax year. Then DO NOT FILL OUT ANYTHING ELSE ON THIS PAGE. NO MORE CHECK BOXES and IGNORE Part III. The last page doesn't apply to you but I always include it in my filings.
Mail or fax the form. I like faxing since I get a confirmation of their receipt of the document and I get to keep the original document for my file in case they claim they never got it.
You'll be receiving some letters in the mail from the IRS. They are just formalities. The first letter will be confirmation of your EIN. The second will be confirmation that they received your 2553. SAVE EVERYTHING IN A PLACE YOU CAN FIND IT. If you lose your 2553 confirmation, they can screw you later if it's not in their system that you're an S corporation due to a C corporations double-taxation standards. (This happened to me once. And I saved myself from a huge audit AND fine by having my proof from THEM that I was an S corporation so SAVE EVERYTHING.)
The Michigan LLC formation has to be the simplest form I've ever seen. It's even easier to fill out than the for-profit corporation since an LLC doesn't have details for shares. Section V is where you have to specify your "partners" such as indicating the name of your umbrella corporation as the manager of the LLC.
Important: When you are filing for the LLC's EIN online, make sure you select the LLC button and then make sure that you specify that there will be 2 on the LLC. (If you don't, the IRS will immediately warn you that it will "disregard" you as an LLC since you can't be a "single member" anymore.)
And, again, the 2 entities are:
2) Your umbrella S corporation in your home state
This is also how you "borrow" your own credit (and your built business credit from your umbrella corporation) to purchase a property since both entities (you and your umbrella corporation) are on the property's LLC.
By the way, the LLC must be in the state where the property is located and not your home state (unless you are purchasing property in your home state). Furthermore, don't use your umbrella corporation to purchase the property.
So, did you get all that?
If not, just shoot me an email: email@example.com
See you at the top!
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