Posted May 29, 2024 by James Billings
Are you still using an LLC for holding title to your investment real estate? I’m here to tell you that there are significant advantages of business trusts for real estate. Business trusts offer a simpler, more secure option for holding real estate investments, providing superior asset protection, ease of management, and anonymity benefits.
The Basics of LLCs and Business Trusts
- Why Use an LLC? – First of all, why do we use these business organizations? Why would you use an LLC? You use an LLC because you’ve been told that you can get limited liability and asset protection.
- The Source of LLC Information – So, who does this come from? This comes from the legal community, real estate clubs, the Secretary of State’s office, and promoters who all want you to set up these LLCs.
The Complications of Setting Up an LLC
- Necessary Steps for LLC Formation – To set up an LLC, you need to file a name registration, articles of organization, and designate a manager. If you don’t want your name on it, you’ll have to hire someone else.
- Ongoing Requirements and Fees – You also need to pay franchise taxes and potentially gross receipts taxes. Additionally, you must have a resident agent, which facilitates legal service. Failure to comply with all these requirements means you could lose the protection of the corporate veil.
Introducing Business Trusts
The Simplicity of Business Trusts
Let’s talk about something much easier: using a business trust company. Business trusts have been around for hundreds of years, originating in England in the early 1800s.
The Historical Context
Back then, getting a corporate charter required an act of parliament, making it very difficult for business people who couldn’t wait. They used business trusts to operate their businesses.
Why Business Trusts Are Not Widely Known
Lack of Education and Profit
Why haven’t attorneys or the Secretary of State told you about business trusts? It boils down to education and profit. There is no business trust education in law school, and no questions about them on the multi-state bar exam. More importantly, there’s no money in it for the state once a business trust is set up.
The Threat of Business Identity Theft
The Risk of LLCs
Business identity theft is a significant risk. For example, an LLC in Nevada had a valuable property owned free and clear. Hackers changed the manager’s information at the Secretary of State’s office and took out a hard money loan against the property, leading to massive fraud.
Comparing Different States
The Myth of Nevada and Wyoming
What about Wyoming and Nevada? These states are often touted for not disclosing shareholder information. However, your manager and resident agent details are still disclosed, making the location less significant.
State Revenue Strategies
States like Nevada and Wyoming have historically changed their laws to attract businesses and fill state budgets, similar to what Delaware did 100 years ago.
The Corporate Transparency Act
New Reporting Requirements
The Corporate Transparency Act requires all reporting companies to disclose their controlling beneficiaries. This measure aims to combat money laundering, but it also increases administrative burdens for businesses.
Equitable Title vs. Legal Title
Understanding Your Biggest Exposure
Your biggest exposure is through equitable title, especially if you own property free and clear. While legal title is often discussed, equitable title is where your real vulnerability lies.
The Limitations of Land Trusts
Privacy Without Protection
Land trusts offer some privacy but no real asset protection or limited liability. They originated from Chicago Title to facilitate partial releases on large subdivisions.
Who Uses Business Trusts?
Real-World Examples
Real Estate Investment Trusts (REITs) and large corporations like Walmart use business trusts. If LLCs were superior, these entities would use them instead.
Practical Applications of Business Trusts
Versatile Uses in Real Estate
Business trusts can be used for holding title to real estate, purchase contracts, trustee lending, and property management. They offer significant advantages like anonymity and reduced administrative burdens.
Conclusion
Making the Choice
In summary, if you’re looking for asset protection and limited liability for your real estate investments, business trusts offer a simpler, more secure alternative to LLCs. They are low maintenance, unlisted, and easy to operate.
Watch this video a couple of times, internalize the information, and consider setting up a business trust. If you need assistance, we offer a business trust e-seminar with a new real estate module to help with escrow, insurance, and other factors related to real estate. Thank you very much.
Get your free copy of the LLC versus Business Trust comparison chart here.
If you have any questions, please contact James Billings, founder and owner of TrustArte, at james@trustarte.com or 619-537-8625. Visit my YouTube channel for video content.