Friday, February 26, 2016

Taking Title on Closing - Cost-Benefit of Incorporating

Maybe one of the most debated topics that come up with Buyers, when they look to close on a rental building. It's not 'a one-size-fits-all' proposition, but we can at least highlight the major considerations.

Benefits - the major ones generally cited include limits personal liability, provides some degree of anonymity, potential tax benefits (assuming the corporate tax rate is better than one's personal rate), and dividend payments (as cash flow to the owners) may be more tax efficient.

On the liability issue, lawyers (at least those on the other side of a claim/litigation), would likely beg to differ with this position, and look to sue directors or company officers when pursuing a legal action.

With respect to anonymity, corporate searches generally reveal the owners/officers of a company, so it may not offer the level of cover you seek. The last 2 points are strictly tax matters - which need to be reviewed relative to your personal circumstances. Keep in mind 'tax laws' are continually changing and what seems practical today, may not be so tomorrow.

Costs - the major ones are accounting and legal costs, especially the expense of the initial set-up. It will vary from deal to deal and based on the corporate structure you are looking for, but rest assured you are looking at costs in the 'thousands'. In addition, you have the on-going expenses - a.k.a. annual yearly statements, legal resolutions/minute books and possibly annual meetings to consider.

Obviously any costs would become less of an issue, if the corporation is destined to acquire 3-4-10 properties, as opposed to a single property. Again - not a 'one-size-fits-all' proposition.

Other factors to consider include property financing (most often lenders want both corporate & personal guarantees}, will/estate planning, and both property/liability insurance. Ensure you consider these items as well, as you weigh your decision on incorporating.

Incorporation - Finally, we often see Buyers incorporate for all the wrong reasons. It should at a very minimum be a 'PROS & CONS ANALYSIS' and it should be realistically determined during your CONDITIONAL OFFER PERIOD. This is not a week before closing matter and best practice is THE EARLIER THE BETER.

We welcome all the horror stories you can send us on setting up corporations for both the right and wrong reasons.

And as usual, just a click/call away from discussing investment opportunities here in Windsor-Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

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