First, congrats on being in the position you’re in! Sounds like you’re going to be well-prepared for RE by the time you start investing full-time.

As for your question, it’s somewhat complicated, but I’ll try to explain it as simply as possible. At the most basic level, it’s not absolutely necessary that you have a corporation. You can do everything without a corporate entity, take money out of your savings each week, etc. But, there are some things you need to consider:

First, even if you don’t have a company, from the IRS perspective, you’re still self-employed and will still owe a couple different taxes on the money you earn. You’ll owe income tax on everything you earn (just like if you were getting a salary from a job) and you’ll also most-likely owe self-employment taxes on everything you earn, even if you just stick the money in savings and don’t “pay yourself.” Because all the work you do yourself is considered business income, you will be treated like a company from the IRS, even if you don’t set up a company.

Now, given that, perhaps you’ll want to set up a company. Doing so may provide you two very big advantages:

1. Liability protection. If someone who is working with/for you gets hurt, or if someone decides to sue you for whatever reason, having a corporate entity that your assets are under will provide you some protection in case you lose a lawsuit. There are lots of different ways to structure a business to protect your assets, but virtually all of them are better than not having a business structure at all.

2. Tax advantages. That self-employment tax I was talking about can be as much as 15% of your income! There are ways to avoid at least some of this tax using corporate structures. Depending on what you’re doing specifically, there may be ways to avoid all the self-employment tax. But, without a corporate entity, you can’t avoid these taxes.

So, in general, while you could probably avoid setting up a company, I’m not sure you’d want to. Yup, there’s some extra work involved in setting it up, managing it, paying taxes, etc. But, you’re going to be doing a lot of this whether you formally set up a company or not, and setting one up will provide a lot of benefits.

Not to mention, you can get people to help you with all of this (set up, legal advice, tax/payroll, etc) for a small fee. It’s well worth it in my opinion.

Just some stuff to think about! Let me know if you have any more questions…

We actually run two separate investing companies. The first is funded by our personal savings, plus we have a line of credit from a small, local bank that finances many of our properties. Between the line of credit and the cash we have invested, we have access to enough funds to hold/rehab about 6 houses simultaneously. (Btw, this is why I highly recommend working with local banks)

Additionally, we own a separate corporation that is similar to a self-directed IRA (SDI), but actually much more flexible. It is funded by portions of my wife and my retirement funds, and allows us to operate a full-fledged investing company using the money. Unlike an SDI, where you can’t materially participate in the investment, the operating company that we have REQUIRES us to be involved in the company’s operations on a day-to-day basis. Additionally, unlike an SDI (or most other retirement vehicles), our company allows us — actually, it requires us — to draw a salary from our profits. There are some downsides — such as the fact that this retirement vehicle must be structured as a C-Corporation and therefore is taxed sub-optimally — but overall, I find it much more suitable to operating a full-time investment business than an SDI would.

If you want more info, shoot me an email…

thanks
Don

-Brian

It’s certainly tempting…though I still have this nagging feeling that if I try to do it, it will come back to bite me one way or the other…

I may consult my attorney to figure out what the worst-case scenario/penalty would be if I got caught, and make my decision from there…

Any luck finding apartments or commercial stuff?