Hello my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from Lorenzo and this actually came in through our website blog. It wasn't through the contact form where you click on the Ask Marco link at the top of the website and his question is basically around asset protection for my real estate empire. So Lorenzo goes on to say, I am in the process of building my real estate empire. Congratulations Lorenzo! I'm trying to do it the right way so it would not cost me later down the line. My questions are, and then he lists out five questions. So I'll take these one at a time just to keep things in a good flow and clear and really there could be an entire episode on really just some of these questions, let alone all five. But I'll give you a good overview of what the answer to the questions are.





So the first question is what type of entity should I form if I want to hold properties development or flip? Okay. There's no one answer to this question because the type of entity you would use for buying hold properties, in essence, your real estate portfolio would be different in almost every case. Uh, if you are doing a development and or a flip because one is a transactional business versus buying and holding properties where you're just having income-producing assets that you want to hold for asset protection purposes. So before I go any further, I just want to make clear to everybody that I am not an attorney, I not an asset protection attorney. I've just learned this through my own personal experience and working with real estate attorneys and studying asset protection on my own. And really it's just years of experience. So my answer to your question is not necessarily the right answer for you specifically, but in general terms, it's what a lot of real estate investors use or do and what most asset protection attorneys would set up for most real estate investors.

So I say most because again there are exceptions to every rule. So in terms of the type of entity at a high level and generally speaking, properties are held in the US in LLCs, a disregarded entity. The LLC is not set up as a partnership. It's not set up as an S corporation. It's set up just plain and simple as an asset holding entity. It's an LLC in the state, typically in the state where the property is held and it is not run as a business. It's simply held as a disregarded entity for tax filing purposes, but you title over the property or properties depending on how many you want to hold in that entity. You title the properties over and they are held and you just maintain the books and you file a return. A, it's actually a form with the IRS every year just stating that you know, this is the status of that entity and it will not pay taxes.

It's a flow-through entity. So any income that is generated from that entity holding your real estate property or properties flow through to the owning member that has the interest in that LLC. So that was a mouthful, but I hope that made sense. Now that is different with an active business such as a flipping business where you have many transactions and you have income and expenses could be a lot of expenses and there's a profit and loss statement. So anyway, that's about as deep as I can get into that. Lorenzo. Second question is, would this be considered a holding company? To a large degree, yes, because it's holding your asset or assets the property. So yes it is a holding company, but the way people use the term holding company in most cases is it's a top-level entity that actually holds title to one or more of your other entities or businesses.

So you have like at the top of a pyramid you have a holding entity and that holding entity is what has title or interests in your other entities that hold assets and or run businesses. That's really the simplest way to think of that. Um, but yes, it is a holding entity.