What is the best way to structure our real estate business in which we own multiple properties to maximize our protection but minimize the operational headache?

I know I have asked you this before, but this subject has become more pertinent. One of my partners thinks the best way is to do it like this: say we have $500K worth of properties. You should have 5 “children” LLC’s that each own the actual properties ($100K in each). Then you have a “mother” LLC that owns the 5 children LLC’s. The mother LLC is the only one directly owned by my partners and me.

I’ve heard of a “series” LLC option which accomplishes the same level of security with layers as with the “mother and children” approach but is much easier from an operational/accounting point of view because you don’t have to operate 6 different LLC’s-just one.

MATT’S ANSWER-

Generally, I recommend that you hold investment real estate in an LLC- a limited liability company. That is unless you buy and sell properties frequently and might be classified as a “dealer” of real estate, in which case I would analyze whether you should operate as an S-corporation. So, let me assume that you are buying and holding these properties as long-term investments.

A series-LLC is not neccesary and may do some damage. A series LLC connects multiple LLC’s and subjects the business to “Affiliate Liability” risks. Affiliate Liability is liability that crosses over from one entity to another, because the two entities are so closely affiliated that the courts view them as one, inseperable entity. You want to avoid affiliate liability. So, there is no good reason to form a series-LLC for rael estate investing, generally, but there are many reasons NOT to form one.

You probably want to consider multiple LLC’s onwing “bundles” of properties with a centralized management structure. I often form a seperate property management company in a structure that looks like this:

Have you ever heard of use tax? Did you know such a thing existed? If not, you may not be familiar with what it is and how it works. Actually, the majority of practice owners we talk with are not. Here’s what you need to know about use tax and what you should do to protect yourself from an expensive audit.

Let’s call use tax the brother of sales tax. Sales tax, as you are likely aware, is assessed on items you purchase for your practice — most of the time. Vendors who sell you product like supplies, furniture, and IT equipment may or may not be required to collect sales tax from you. If you are buying all of these items from an in-state provider, you are most likely in good shape. However, out-of-state vendors may not have a responsibility to collect sales tax from you. For instance, a vendor from whom you purchased a product over the internet or through a catalog may not collect sales tax on the sale. Contrary to some belief, this is not a built-in discount — this is where its brother, use tax, kicks in.

Most states have a use tax that is self-paid by the purchaser of products when sales tax is not collected. So when your dental practice purchases a new chair online and sales tax isn’t assessed, you are then responsible for reporting and paying use tax on this purchase. In addition, if you paid sales tax on the purchase but at a lower rate than your state’s sales tax rate, you may be liable for the difference. Say you purchased an order of cotton balls online and the supplier collects 5% sales tax on the order. If your state has a 7% sales tax rate, you should then report the 2% difference to them and pay it.

The most important thing to be aware of here is that someone is responsible for paying some tax on these purchases (unless they are specifically exempt, which varies by state and usually includes prescription drugs, etc., but more on this later). If a vendor forgets or didn’t know they were supposed to charge you sales tax, it’s your responsibility to pay it as use tax.

Why haven’t you heard of this before? Many dentists and small business owners just aren’t aware of the use tax. Historically, there haven’t been a lot of audits of small firms for owners to be concerned about it. But this is changing. With states seeing massive budget shortfalls, they are looking anywhere they can to find missed revenue. In many cases, they are able to go back 7 or more years to audit your purchases and identify purchases made where sales tax was not assessed. When an audit occurs, not only is there risk of a tax assessment but also penalties and interest.

As mentioned above, there are some items that are exempt from sales and use tax. These vary by state so I’m going to share with you a link to Iowa’s exempt items list which is specific for dentists. Indiana’s is much more vague in identifying specific exempt items; however, the rules for some states often have similarities and overlap in their definition.

So what should you do for your practice? Be aware of the purchases you make and if you are paying sales tax at the time of purchase. If you are buying products online primarily to save sales tax, know that this isn’t a legitimate savings strategy. If you feel you have made purchases where sales tax has not been paid, consult with your dental CPA or tax adviser to develop a plan to address the exposure. And by filing now, you will shorten the period of time with which an auditor can go back. Usually timely filing of returns starts a statute of limitations on how far back an audit can go – even if it’s a zero tax return.

- This article was submitted by our friends at Veros Dental | 5955 South Emerson Avenue, Suite 500 | Indianapolis, IN 46237 | 317-452-4580

Warranty of Habitability from Matthew Griffith on Vimeo.