To Form a Company or Not to Form a Company

[Margie]

I need some advice and hopefully someone out there will give me an honest answer. My Partner and I have just bought a property (house and land) and we intend to develop, i.e. sell off house and subdivide and build two new houses to sell. The property was bought on 10th June and our lawyer has advised us to form a limited liability company and put the property into the company name. We have been told that doing this will protect us personally and the house that we currently own and live in and any money we have in the bank if things go sour because the company will be liable. We have also been told that we can claim back the GST as soon as the property is in the company name.
Are we doing the right thing as opposed to forming
a) a partnership
b) a Family Trust

We're quite nervous about whether this is the right way to go because we have been dicked around by the accountant we engaged (who in the meantime has now said he doesn't want to have our business) and the lawyer.

Any advice will be appreciated.

[AustinWong]

As I understand you should have set up a business before buying so that the house would have been under the company's name when purchased. Not sure the ins and outs from here but maybe you can pay for title transfer still.

As for doing the copany thing to protect you from the bank, well I think the banks may be ahead of you there. If they lend you money for a company, they get you to sign to say you are still liable.

My suggestion is you find yourself a good accountant who comes recommended so you can sort this out.

Check on the forum topics and see if you can find recommendations for an accountant.

All the best.

[wada]

Hi,

Welcome to PT Margie. Your question is one that some other forumites have done so hopefully they can provide some helpful info. We are looking at doing the same to our property in the future and have found the following points:

1) If you subdivide your section and sell it (ie with no dwelling) then you may be exempt paying tax of any profit. This is because the section is in your personal name. Our property is owned by a trust so if we did this we will have to pay tax on our profits ... unsure if this applies to a company etc.
2) If you subdivde, build the 2 houses and then sell them you may be liable of paying tax on any profits. This type of thing is what the IRD would see as 'trading' not investing. That is you are now going for the quick cash and not for long term investing. This could also lead to 'tainting' any future investments. However, if your plan is to build 2 rental properties and then sell later on then you may be exempt. It is your 'intent' on why you subdivided that will determine if you pay tax or not. You will definitely need to talk to an accountant who is an expert in this field to make the right choice.

I'm not an accountant and when it comes time for us to subdivide then we will get an expert in.

Wada

PS Changing the ownership entity on the land title is expensive but maybe a good option.

[Margie]

To Form a Company

HiWada and Lawrence

Thanks for the replies and the info.
I should have mentioned Lawrence, that we paid cash for the property (no loans). At present, the property is still in the previous owners name as our lawyer has the documents and is just awaiting on the company name being registered - I believe we have one month to complete the documentation???
I presume from what you and Wada are saying that it is best to put the sale of the property directly through the company when it is registered (will take this up immediately with our lawyer).
I do understand the 'tainting' issue and appreciate that we have to be careful in that respect.
I understand from what you say that we should be ensuring that the property is bought by the company from the start and not by us and then transferred across.

Margie

[Dean@Massiveaction]

Hi Margie, if you intend to keep investing you definitely don't want it in your own name. Generally you would form a trading trust with a corporate trustee to trade property to avoid tainting. ANd any buy and holds you would put in an LAQC if they will show a loss or straight into a trust if they won't show a loss. But everyones position is different. Talk to a GOOD property accountant before you finalise any paperwork.

[centrefold]

Pooomba

avoid tainting.

What do you mean by tainting?

[fudosan]

What do you mean by tainting?

Once you are regarded as a trader by IRD, that taints your buy-and-hold properties. You must pay tax on any gain from buy-and-sell properties as well as buy-and-hold properties.

[Dean@Massiveaction]

Hi Centrefold, just a suggestion but you ask a lot of questions that are answered all over the place in this forum. Suggest you do a search on some terms before posting. I assume you're trying to get your signature seen a lot, which is cool, but if your questions are genuine have a looka round before posting for definitions of basic IP terms

[AustinWong]

Sorry Margie..I have no idea where I got the idea you were dealing a bank.

Personally i would not spend too much time trying to find the right answer here as you have a restricted time limit. Also you will get the best advice from a professional, whom with you will likely be dealing with for time to come.

As for what Wada and I are saying... is go see a good Accountant. We are not accountants and it is unlikely your circumstance is the same as ours.

Remember, what you read on this or any forum are opinions and experiences people have had to suit their circumstances.

Spending money on an accountant will probably pay good dividends as they can tailor something to suit you.

As an example I found out from my inurance broker yesterday there may be a means to set up a trust via a company set up. Something I did not know about, so now I need to find a good accountant to hopefully confirm this information.

[clips]

the glory of an Laqc is the streaming of income to the director with lower tax status, or distribution of loss to offset directors other income. If the company is borrowing the directors will probably have to sign up personal guarantees which exposes you if it all turns to custard....

A trust can stream income but cannot attribute losses...... someone else here probably knows about partnerships..

[Josko]

As an example I found out from my inurance broker yesterday there may be a means to set up a trust via a company set up. Something I did not know about, so now I need to find a good accountant to hopefully confirm this information.

This is called a corporate trustee, rather than having individuals as trustees, a company becomes the trustee.

Margie,

I advise you discuss with your lawyer and find a new accountant.

Regards,

[centrefold]

Pooomba:

if your questions are genuine

They are. In fact all my questions are genuine!

Thankyou Fudosan.


Jane

[Roger_2004]

Ivi

a company becomes the trustee

If George sets up a Trading Trust.

Can he also set up a company to act as corporate trustee?


Thanx

[MarkS]

Hi Margie

As has already been said you need to see a professional and not just your neighbourhood accountant or lawyer but an entity specialist.
What you are contemplating is property development or trading and you WILL become tainted. If you intend to buy or sell property other than this deal you will end up losing money needlessly to the IRD and may face penalities if the IRD challenge you further down the track.

A few dollars spent now to set things up properly will save ten times, or more, that much later!

Hope this helps.

Mark

PS: What you say your lawyer said in the first post is a recipe for disaster. Change them!

PSS: Good on you for taking action and buying investments and also for checking here on the forum

[MJU]

Margie,

I think your lawyer's advice has been discredited as a little facile, but they are right to raise the issue.

BE prepared to spend a SERIOUS sum of money - balance it against the keeping of profits later, and the ongoing opportunity to enjoy some activities tax free.

You should speak to one of:

Jeff Owens Matthew Gilligan
Jeff Owens & Co Gilligan Rowe
04 972 8944 09 522 7955
[email protected] [email protected]


Regards,

MJU