BiggerPockets

I'm looking to start a company with two family members (cousins) for long term real estate investments in rental properties.

We are trying to determine whether a LLC or S-Corp would be a better fit. Initially any cash flow would stay in the business.

We plan on meeting with an accounting and lawyer but I'd like to find out what other people on this board are using to protect themselves and shelter taxes/income.

Any input is greatly appreciated.

Thanks,

Kelly

You should get an LLC. Its has better long term goals for real estate. Check out www.mynewcompany.com You can ask those guys. I just formed my company. Worldwide Property Solutions, LLC.

And also pick up the book the " ABC's of Real Estate Investing" forwarded by: Robert Kiyosaki. That book will let you know why the LLC is the best.

An LLC is ABSOLUTELY NOT always the best decision. It depends HUGELY on what each founder's financial and tax situation looks like now, what it will look like in the future, what your company exit strategy is (manage for life, sell to strategic or financial buyer, hand to your kids, etc.), how quickly and in what fashion you want to receive cash, whether you'll ever take on new partners or investors, and about twenty other important questions.

Any organization that always advocates one company model over another almost certainly only really understands that first company model. I've started three LLCs but chose LLC as the structure for specific reasons.

Nolo has some excellent books to help you get started, and I love them, but only use those if you intend for this company to remain small; less than $10 million in revenues or assets. If you're thinking bigger (and even if you're not):

1. EACH FOUNDER SHOULD EXPLICITLY SET & STATE THEIR GOALS. What do you want to get out of this? How much money? When? How long do you want to do this? How much time and effort will you put in? Is this a part time or full time gig? What specific things do you bring to the table? What will happen in 3 years if one of the founders wants out but the others want to keep going?

2. Then, go see an attorney. Without clear goals, they can only give you crap for advice.

Good luck!

It just costs legal fees.

I have an LLC where I was raising angel investor money and ran into a few folks who wanted to change it to an S-Corp because case law is more established in terms of payouts and equity/ownership. We ultimately decided to keep the LLC structure but write in the changes to the Operating Agreement so there would be no mistaking who owned what and how and when they would get paid. My venture capital contacts said they wouldn't even look at it as an LLC and discussions would start on the premise that the company was converted to an S-Corp; but VC isn't interested in investments under a few million.

To change from LLC to S-Corp, I believe that every single member of the LLC must agree in writing to the terms. If it's just 2-3 people, no problem. If you've got 20+ it could be a problem as even a single person can prevent the conversion.

There is also the issue of asking the IRS to treat your LLC as a corporation; this may functionally resolve the problems above, but again, the investors I've spoken to don't really want to deal with an LLC and you've got enough hurdles to jump through in getting their money without having to convince them of the LLC benefits.

So, it would certainly seem viable to start an LLC and if it gets bigger / better, convert down the road if necessary. But, the more money, time and effort that get tied up into the LLC, the more complicated (and expensive) the conversion is likely to be!