The first 10 years of my Kenyan Real Estate
investing I ran my business as a sole proprietor because I really didn't know
any better. Luckily, I survived with only minimal damages, but there comes a
point when it is time to assess the best legal structure to use for Kenyan real estate investing.
If you ask 10 experts in Kenya or any other
country, you are likely to get 10 different opinions. With that in mind, I'll
share my opinion and experience. Remember: free advice is always worth what you
pay for it.
If you are a beginning investor, it's
probably best to not worry about asset protection until you actually have a few
assets to protect. Why spend time and money setting up a business entity and
creating tax reporting requirements unless you need to? It's like buying full
coverage auto insurance on a beat--up Glitch...what's the point?
Once you have assets and something to
protect, then it's time to set up your business structure. Question # 1: what
is your net worth? Question # 2: do you have assets that are at risk? If the
answer to either of those questions is, "Yes," then you need to take
the next step.
Assuming you want to set up an entity for
wholesaling properties, the most popular are an LLC (Limited Liability
Corporation) or a C Corporation. There is much debate about which one is better,
but I prefer the C Corporation because the first Kshs. 4.3M is taxed at 15% and
you can have a kick-butt employee welfare plan to write off many expenses. With
an LLC, the income is passed through. If you start making money, you'll wish
you could pay only 15% on some of it! Trust me on this one.
Why is the tax issue such a big deal?
Here's a simplified example. If you make
Kshs 8.7M personally you are taxed on the full amount (35%) and have Kshs. 5.6M
left. Anything you buy for yourself comes from after-tax Kenya shillings.
However, with a C Corporation if you could make the same Kshs 8.7M on paper,
but have Kshs.4.3M in allowable expenses that you can write off. So you get
taxed on that Kshs. 4.3M at 15% and only have to pay Kshs. 652,500 in taxes compared
to Kshs. 3,045,000 on your personal income.
What type of expenses can you write off in
a C Corporation? It depends on how your Company is structured (see your
accountant/attorney for details), but you can often write off basic expenses of
things like a bed or even a swimming pool. You're thinking, "No way!"
Let me explain how it's done. If you have an employee welfare plan that covers
your medical expenses and your doctor gives you a prescription for aqua
therapy, it's possible to write off the cost of the swimming pool. Yes, it's
crazy, but I don't make the laws. Another more common example is a prescription
for a new bed if you have a bad back. I have a "Sleep Number" bed
myself, just like Paul Harvey J.
A very wealthy man once told me "It's
very hard for a C Corporation to make any money!" What he was trying to
illustrate was that C Corporations can expense pretty much everything and look
like there is little or no profit. You still can buy the same stuff, but you
are taxed less if you structure things correctly.
Visit www.kenyan-real-estate.com for
more enlightening stories about Kenyan Real Estate.
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