LLC or Corp???

Question

Starting wholesale business in New Jersey.  LLC or S/C corp?? should i go online or do it through an attorney??

J Scott · Answer

I agree, though I would generally recommend an LLC electing s-corp tax status over an actual s-corp.  Management of an LLC is generally less time-intensive than management of a corporation, and the opportunity to pierce the corporate veil is more likely with a more complex entity.

But again, consult a CPA and/or attorney...

Mark Wagner · Answer

1.  I agree with Ebere's 3-point post above.

I'll add that recent court cases have significantly weakened top-down protection for assets inside a single-member LLC.  This makes it more important to have another member if asset protection is your goal.  (At least until the state legislatures get it sorted out.)

I will also add that while S-corp status "can" save self employment taxes, this only works if the business is spinning off enough cash to pay a reasonable salary.  And most real estate investor clients I have never actually achieve this level of performance.  It's great in theory, but not so much in practice.

2.

You are confusing Federal tax code with state LLC laws.   LLC is a designation created and enforced by the state.  It has nothing to do with taxes.

There is no tax code for "LLC."  So you are allowed to tell IRS how you want to tax the LLC: as a disregarded entity, partnership, C-corp or S-corp, depending on circumstances.

So really the choice is not "LLC or S-corp" but...

First, do I want an LLC or a regular corporation?  This is an asset protection decision.

2nd, if I choose LLC, what is the best way to tax the darn thing to take advantage of the tax code.

Ebere Okoye · Answer

Ok, you get the advantage of hearing from a CPA to Real Estate Investors on this forum. Here are my two cents. I usually advice my clients to form entities based on three factors - legal protection, tax reduction, compliance.  You have already noted the difficulty of  finding one that meets all three criteria.  Right now, the best one I see out there to use is the MULTI-member LLC with a GOOD COMPREHENSIVE OPERATING AGREEMENT/UMBRELLA POLICY.  While I cannot exhaust this conversation on this forum, I will highlight the main advantages.

1.  LLC's have the least compliance requirements. no minutes, BOD meetings, even no formal agreement but I strongly suggest using a comprehensive operating agreement. I currently use a 121 page one for my clients.

2.  Multi-member LLC's can help in asset protection by dealing with bottom up creditors (has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the company rather than from the acts or omissions of a member, manager or employee)
as well as top down creditors (gets a judgment against the member because of the member's acts or omissions, rather than the acts or omissions of the LLC, its managers or employees). With a good operating agreement and an umbrella policy, you can minimize(NOT MITIGATE) your exposure.

3. Multi-member LLC's electing to be taxed as an S corp can help to reduce our exposure to Self Employment tax since your real estate strategy (Flipping) will generative ACTIVE business income.  S.E. tax rates are at 15.3% (13.3% for 2011)

So while you may not have all the asset protection you want, A good multi-member LLC with a carefully drafted operating agreement and an umbrella policy, taxed as an S corp is the best shot out there for a rehabber/flipper.

Your Entity structure should always start with your real estate strategy in mind and then drill down to the best structure that will solve all three issues (compliance, asset protection, tax reduction).

Bill Walston · Answer

Braden, no, you cannot be a MMLC.  A MM-LLC must have two or more members.  You CAN, however, be a single-member LLC taxed as an S-Corp.

Short answer: All things being equal,  for flips or rehabs (which generate ordinary income) you would most likely choose the S-Corp election.  For "buy and holds" (rentals) you would use the default status for taxes.  Since you are a SM-LLC the rental income and expenses would be reported on a Schedule E on your Federal 1040.

Account Closed · Answer

If the owner actively participates in generating revenue, then the income is hit with Self Employment tax.  In a default LLC taxation structure, there are no salaries for the owners, and the profits are all considered SE income (up to a certain point).  With the S-corp or S-corp elected LLC, the owner has the option to save on SE tax by giving him/herself a low salary and distributing the rest of the income as a profit distribution.  Only the salary is subject to SE tax.  However, the salary has to be reasonable to your industry and an extremely low salary pretty much throws up red flags for an audit.

If the income is all going to be passive, then you've got preferential tax treatment anyway and no SE taxes will be paid so all the LLC does is limit your liability.

J Scott · Answer

You're going to get conflicting advice from people here (for good reason -- there are benefits and drawbacks to both)...

The best recommendation is to talk to a CPA, and if you have significant assets to protect, talk to an attorney as well.

If you don't know how to set up an entity yourself, have your CPA or attorney do it for you.

Mark Fitzpatrick · Answer

This is exactly what a very good attorney told me. LLCs for passive investments like rentals, Corp for active businesses like flips, wholesaling, etc.

Also, I would highly recommend consulting with an attorney to set it up instead of a LegalZoom or something like it. There's no substitute for being able to ask questions and have them set up the proper structure based on a conversation with you.

I can give you a referral to who set up our entity if you like. We've been very happy with them.

Chris Weiler · Answer

I will echo the need to speak with your CPA and a competent attorney. That being said, if you are actively involved in the business it is usually best to go with an S-corp. If it's a passive investment, it's usually best to go with an LLC. Sounds like you need an S-Corp. If it's your first entity I would highly recommend having a decent attorney set it up for you. It will be more expensive, but worth it. The number one reason you are creating an entity is for liability protection. If it is not set up correctly, you leave yourself exposed.

Account Closed · Answer

Is this due to the SE taxes, or is there another reason I am unaware of...also you can switch legal entities from an LLC to an S-Corp by making that election with the IRS?  Are there stipulations on how many times you do this?

Steven Hamilton II · Answer

Bill Walston, is exactly right.  That is what I advise my clients; however if you are in a higher tax bracket(28 or above) you may want to consider a C corp to tax the income at a lower rate.

-Steven the Tax Guy

Your guide to IRS laws, rules and regulations.

LLC or Corp???

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