I'm new here, and I have a question about the way LLCs should be set up and how they are taxed.
I am thinking of investing in a duplex, and renting out both units. When forming the LLC, I am wondering should I form it as a disregarded tax entity since I would be the only member of the LLC? Or should I apply for an EIN, since this way I could separate my personal and business accounts. And when it comes time for taxes, I am wondering which schedule needs to be filled out for reporting income and expenses(Schedule E or Schedule C)?
I feel like a complete newbie, but couldn't find a sure straight answer for my questions through the search.
1. Get an EIN and you can start to build a company credit file.
2. Your tax returns will not change much as a sole member LLC. You can just file based on your tax returns.
3. Even if you elected to file as a partnership the tax impact is almost zero compared to a sole member filing under the tax ID of the individual. Some extra paperwork but no difference in the tax paid.
Best that you get a tax professional explain the subtle differences and then help fill out the paperwork.
Your LLC should be set up as a pass-thru entity and certainly get an EIN. Without an EIN, you've really got nothing. Courts look carefully to see if the LLC is really a separate entity as opposed to an alter-ego of the owner. Having an EIN and separate checkbooks helps establish that it is a real company.
I would be concerned about setting up a single-member LLC. A recent court case denied protection because the LLC was ruled to simply be the alter-ego of the single-member owner. Pat Tarr, who is a respected asset protection attorney, warns against using single-member LLCs.
In setting up the LLC as a pass through entity and obtaining an EIN, will all income and expenses just be reported on my 1040? I would be the only member of the LLC, but would keep all business accounting separate. I am guessing rentals go on schedule E.
I am not a tax expert. I pay a very smart lady to do my taxes. However, my understanding and experience is that the LLC will file its own return and the profit or loss from that return will show up on your 1040.
That sounds like an LLC that has elected to be taxed as a partnership. It is a fine choice. A partnership status allows for more than 1 member and for the income to pass through.
You can also have an LLC that reports for tax purposes on your individual return. You can only do this with 1 member (a married couple would be 2 members if both are listed as members of the LLC).
Tax ID for a company. Similar in purpose as an SSN for an individual. The company reports it on their tax return or other filings with the IRS. One ID that can be used for filing credit information (DUNS number being a second and maybe more popular ID for company credit).
An EIN for a company is like a Social Security Number for an individual.
Edited: 06/26/2010 at 03:48AM
Joshua Dorkin, BiggerPockets, Inc. E-Mail: webmaster@biggerpockets.com Telephone: 877-831-4704 Website:http://www.biggerpockets.com Be sure to check out the BiggerPockets Blog at http://www.BiggerPockets.com/renewsblog/
AS A MORTGAGE PROFESSIONAL I HAVE ALSO LEARNED THAT SOME LENDERS WILL GET LOANS APPROVED WITH EIN NUMBERS. BUT THIS IS CHANGING DAILY AS WELL AS THE LENDING GUIDELINES.
I was wondering how the partners in a LLC get loans. Will the bank look at the partners assets and incomes to determine if the LLC qualifies for a loan or do they look at the property and see if it looks like it can pay for itself via rents... I'm still a little fuzzy about how the LLC's work, thx.
Earlier in the FAQ, there was some discussion about whether or not to create an LLC for each individual property or holding.
Then in this thread, there is discussion about the need to have partners to head off any perception that an investor would be using an LLC as an alter ego.
Does that mean every LLC created needs partners to be effective?
Your LLC should have at least 2 members to keep it from being judged your alter-ego. However, that 2nd member can be your wife, your father, your sister, your child, or anyone else you would like. Also, they could have a 50% stake or a 1% stake - you don't need to be equal partners.
I think the discussion is heading down a dead end.
Alter-ego issues relate to how the LLC operates. The court will look for signs that the LLC is a proper business entity and operates as one. Having more than one partner is just one factor or variable. There are many ways for the LLC to demonstrate that it is separate from an individual (tax ID, checking accounts, books and records, how documents are signed, separate credit cards, business address, etc).
Note also that if you ask a corporate attorney about this you will get lots of different answers. We are talking about guidelines or interpretation. LLCs are organized at the state level and what is practice in one state will be different than in another state.
As a general rule I suggest you find an attorney and spend some money when setting up an LLC. More so that you learn how to operate correctly and less about the cost of filing the paperwork. The paperwork is not all that hard to organize. Operating correctly and knowing what needs to be done is the key.
Reviews with a lawyer after the LLC is up and running will also contribute to showing that you are operating a business and not just creating a clone of yourself. No one item is the magic test.
Jun 19 '07, 12:53 PM
