Business Management

4 Different Types of LLCs and the Ways They Pay Taxes

Expertise: Personal Finance, Business Management
39 Articles Written
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The following is meant for informational purposes and is not legal advice. For information pertaining to your specific legal situation, please be sure to consult your attorney.

There are many different types of LLCs available for real estate investors. Which one is best for you depends on a variety of circumstances, including your personal real estate goals. But one thing many investors initially overlook is that each type of LLC comes with its own tax possibilities and obligations.

Surprise, surprise—for every different kind of LLC, there are also different tax requirements! It’s important for you to know the different taxes for each kind of LLC, ideally before you even form it. The types of taxation may make a major difference depending on your circumstances, so you want to do what’s best for you. And it’s in everyone’s best interest to keep our friends at the IRS on our good sides. The more you know, the less likely you are to get into it with Uncle Sam.

We’ve been over that before. Tax disputes aren’t pretty, folks.

Let’s go over the different kinds of LLCs, along with the taxes you have to pay for each particular type of LLC.

The Single-Member LLC

The single-member LLC is an LLC with only one member, as its name suggests. The single-member LLC will always have pass-through tax treatment. What this means is that, instead of having to pay the 39.1% corporate tax, you can include the profits of your LLC on your income taxes. Specifically, the profits and losses from the real estate within the LLC will be reported on Schedule E of your income tax return.

A Married Couple LLC

A married couple LLC is an LLC whose only members are two people who are married to each other. Like the single-member LLC, a married couple LLC will usually have pass-through tax treatment. There is one huge exception: This isn’t the case if the LLC is formed in a community property state. Do your homework on this if taxation is a major motivation for forming this type of entity.

Related: How to Grow Your Wealth With an IRA-Owned LLC

If your LLC is formed in a community property state, you will have to file a partnership tax return for your LLC. As of 2018, the following states have community property laws: Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin.

If you file a partnership return, you and your spouse will each have to include your respective shares of the profits on your income taxes. This is the main area you’ll have to keep really clean, so you may have to do what some couples find difficult even after decades of marriage: Actively communicate with your partner. Use your words, and listen actively to what the other person has to say before responding. Empathize with their concerns, and address potential points of contention logically. While I’m not your lawyer based on this article and therefore can’t dispense direct legal advice, I’d just go ahead and recommend this as good general life advice.

Multi-Member LLC

If your LLC has two members that aren’t married, then it’s considered a multi-member LLC. A multi-member LLC also receives pass-through tax treatment. Each member will claim his or her share of the LLC’s profits on their tax return. As an added bonus, a multi-member traditional LLC is more difficult to pierce in court.

Previous commenters on my articles and in the BiggerPockets forum often ask about ways to prevent your LLC from being perceived as an “alter-ego” of you. A multi-member LLC formed with someone you trust is one maneuver you can make to prevent this possibility.

The Series LLC

If you’ve read my blog postings before, you may already know a bit about the series LLC and its many awesome uses. The series LLC uses a parent-child structure, which allows you to create as many “series” as you want. These series operate directly under your parent LLC, but are treated separately for liability purposes. They work exactly like miniature LLCs, complete with liability protection. Think of the parent LLC as “Big Daddy,” with each series as a different child. Big Daddy can have as many babies as he wants, without waiting nine months like us mere mortals have to. But when it comes to paying taxes with an (S)LLC, things can get tricky.

For example, in California, each series in a series LLC will have to pay an $800 franchise tax. For this reason, I often recommend that California-based investors check out the Delaware Statutory Trust (DST). It offers the same benefits as the series LLC and no obligation to pay the franchise tax. Why? Simply put, the DST is a type of trust. Trusts are viewed as estate planning tools, and the strict laws in California that apply the franchise tax to LLCs do not apply to the DST.

But in Delaware, no matter how many series you have in your series LLC, you’d only pay the $300 franchise tax one time. Texas series LLCs must still file annually, but are actually not responsible for any annual corporate taxes. Investors who use a Texas series LLC simply file “no taxes due” with the state comptroller annually.

And now for the good news: You can create a Delaware series LLC or a Texas series LLC without actually living in either state. You are not always bound by your geography. This is where your ability to do a little bit of research, combined with your willingness to ask for help from a qualified attorney, can really save you a lot in the long-run.

Related: The Traditional LLC vs. the Series LLC: Which is Better for Real Estate Investors?

Because the series LLC is fairly new, most states allow you to choose the way it gets taxed. Most investors opt for pass-through taxation, but your circumstances will help decide which choice is best for you. That said, as new laws get passed, this may or may not change from state to state. Just consider that another big reason to get help from a professional.

Bottom Line: Seek Professional Help Before Forming Your Real Estate LLC

A qualified attorney and CPA can be your biggest assets when deciding which type of LLC to form. When vetting your professionals, consider seeking out pros who are also investors themselves. Such professionals are able to view your situation through two lenses: their professional judgment and experience and their experience as fellow real estate investors.

I hope this information has been helpful to you. If you have any questions about the tax treatment of LLCs, (S)LLCs, or other entities, feel free to fire away in the comments below. I do this for a living, but am always happy to help answer questions that help other investors understand the tools that help us become and stay successful. Even if they involve taxes.

Questions? Comments?

Leave them below!

Scott Royal Smith is a real estate asset protection attorney based in Austin, TX. His firm, Royal Legal Solutions, designs asset protection strategies exclusively for real estate investors. As an investor himself, Scott is sensitive to the needs of real estate investors; as an attorney, he maintains a working knowledge of the best legal strategies available for preventing lawsuits. Connect with Scott here on BiggerPockets or visit his website, www.royallegalsolutions.com, for more information about asset protection for real estate investors. Check out all of Scott’s previous work for BiggerPockets here.

    Jerry Rien Investor from Scottsbluff, Nebraska
    Replied 10 months ago
    Very good info in this article, thank you for posting. You explained each type in an easily understood format.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Thank you! I’m very glad you found it helpful.
    Joe Tomko Specialist from Easton, PA
    Replied 8 months ago
    I don’t think you really addressed what your title states. Correct me if I’m wrong, but the number of members is ancillary to how an LLC is taxed. My understanding is an LLC can be taxed as a sole proprietorship, an S Corp, a C Corp, or a partnership and only those four ways. To say an LLC is a pass through entity is not correct. It CAN be a pass through entity, depending on how you elect to have it taxed. Am I mistaken?
    Isaac Agbolosoo Rental Property Investor from Grosse ile
    Replied 10 months ago
    @Scott Smith: The LLC application within 50 states, is a basic document that any person that can read and write should be able to ” DIY”. Why should attorneys be involve? Next, I do not understand the feasibility of setting up an LLc out of state besides where the property is located. For example an LLC in Texas and property is in Indiana. Indiana law requires that, LLC’s not formed in the home state should be registered as a foreign LLC. These are additional expenses and could defeat the purpose of asset protection, complicated tax filings. Finally, any LLC formed out of states besides where the property is located c requires a registered agent- additional fees. I think it is more easier forming a corporation within the state where the business is located.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Great questions and thoughts as always, Isaac. Just because the Traditional LLC is uniform in all fifty states does not mean that an entity is one-size-fits all. The templates online may be compliant with the state’s laws, or they may not. You never really know unless you have the legal training to assess that, or at least have an attorney look over it. You could DIY LLC formation, but you’re going to have to familiarize yourself with the legal requirements for Articles of Incorporation, Operating Agreements, EIN number, filing requirements, and compliance requirements. For many investors, this would take a lot of time. If you’re an investor with great familiarity with these elements and the state laws regulating your LLC, power to you. But for many investors, this is not the best use of their time. Most prefer to spend their time running their business rather than pouring over all of these elements. None of us know what we don’t know. But what you don’t know can really come back to bite you. Attorneys are helpful for ensuring your entity really is the best one for you, that you are using it correctly and most effectively for business and tax purposes, and maintaining compliance. This doesn’t have to break the bank either. You can absolutely use educational articles like this one to make a list of questions to bounce off of a professional–many will help you for free or very cheap. As to your question about out-of-state entities: sometimes an investor living in a state with many taxes and regulations, such as California, will find operational benefits for an out-of-state LLC or Series LLC. Sometimes investors want a Series LLC, but their state does not offer one, making out-of-state the best option. Registered agent fees really aren’t that costly. Multi-member LLCs may even have to option of having a member serve as the registered agent at no cost. You have several options for taking care of the registered agent requirement, a subject I’ve written about before here on BP. A professional registered agent can be hired for under $100. If you elect to use an attorney to form your LLC, many of us offer registered agent services as part of the entity’s formation. I can’t speak to every lawyer’s practices, but this is pretty common and I know my firm serves as registered agent. The cost isn’t that major in the context of a real estate deal, and the rewards of having a compliant structure are many. You can learn more about the Registered Agent options here: https://www.biggerpockets.com/renewsblog/all-about-registered-agents-for-your-out-of-state-llc/ This is just an educational article. I’m not telling you what to do, just making investors aware of their options when it comes to LLCs. If you find a corporation is better for your business, that may be true for you. I don’t find it to be true for my investors, but again–there is no one size fits all solution for entities or asset protection. Thanks for your thoughtful and challenging comments! I hope you got something out of the article even though you disagree on certain points. These are just my thoughts on the subject, and absolutely not a substitute for personal advice from a professional familiar with your situation. But feel free to rip any information you find here to bounce off of your chosen professionals. That’s what it’s here for! Thanks for reading.
    Isaac Agbolosoo Rental Property Investor from Grosse ile
    Replied 10 months ago
    @scott. Thanks for taking the time to address my concerns :). I really still think the best asset protection will be offshore trust/ LLC, offshore accounts. Courts has pierced through almost every strategy with subpoena document …
    Isaac Agbolosoo Rental Property Investor from Grosse ile
    Replied 10 months ago
    @Scott smith: Here is something I am struggling with. Maybe you may help me clarify 🙂 Whats the best way to hold title to a property? – I realize that my private information (ownership structure, purchase price, address and mortgage information) is accessible to everyone via internet. Using LLC/Trust, still calls for an individual name to be a grantee/grantor of the trust/LLC and the grantee/grantor name is published online register of deeds. So regardless of how sophisticated once asset protection is. The owner has his/her name somewhere on records. There has to be some better options?
    Joe Tomko Specialist from Easton, PA
    Replied 8 months ago
    Anderson Advisors in Tacoma WA can help you. They have legal ways to preserve anonymity. I have no affiliation with them, but use them.
    Bo Wagner Attorney from Brookhaven, GA
    Replied 7 months ago
    I didn’t think so much that this article is a ‘sales tool’ for lawyers (the comment below this one), mainly just good info (though Series LLC’s aren’t available in all states and setting one up out of state may not make the best sense for tax purposes in your state). My additional thought is to check with a CPA as well but that’s my opinion. I agree with Isaac about avoiding complexity! Final shot re: LLC’s–sure you can easily set them up yourself, but for the same cost as doing it with “Legal Zoom” or the like, you can probably find a LOCAL attorney who can help you (who can also chat with you vs. ‘fill in the blanks’ online). Just my personal opinion, but yes, as a real estate attorney, I am DEFINITELY biased : )
    Dave Chow Investor from KS
    Replied 10 months ago
    Nowdyas there are so many articles that try to sell their services and in a way mislead readers. I like the following article a lot and it’s very helpful regarding deeply understand LLC structures: https://www.johntreed.com/blogs/john-t-reed-s-real-estate-investment-blog/65996803-how-should-you-hold-title-to-real-estate-or-your-business
    Lloyd Cook from Leona Valley, California
    Replied 10 months ago
    Thanks for posting John’s article, extremely interesting. Makes me think a lot about what I should or should not do.
    Josh Jenkins Rental Property Investor from College Station, TX
    Replied 10 months ago
    Great article. I think a great book for someone wanting to do more research on LLCs is Garrett Sutton’s How to Use LLCs. You should speak to an attorney also but read the book first to know what to talk to them about. The purpose of the LLC is asset protection. The amount of money and complexity that go into setup will vary with each investor and the amount of equity they are willing to leave exposed.
    Josh Jenkins Rental Property Investor from College Station, TX
    Replied 10 months ago
    Great article. I think a great book for someone wanting to do more research on LLCs is Garrett Sutton’s How to Use LLCs. You should speak to an attorney also but read the book first to know what to talk to them about. The purpose of the LLC is asset protection. The amount of money and complexity that go into setup will vary with each investor and the amount of equity they are willing to leave exposed.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Thanks Josh! Appreciate the recommendation. There’s no such thing as too much education on a subject as important as your corporate structure. Many investors find ways to form LLCs but make serious mistakes in using them without professional guidance, as I alluded to above. So this sounds like a great resource, though I have not read it personally. But I absolutely encourage investors to arm themselves with as much information as possible ahead of speaking with a lawyer, if only to get the most bang for your buck. Oh boy, I hope the other lawyers don’t come at me for that one! But essentially, your time is better spent if you know which questions to ask. In fact, as an attorney, I prefer highly informed clients because it makes my job easier. And yes, you’re absolutely correct. The best type of LLC for you will depend on a variety of factors for your personal situation. Yet another good reason to have experts involved.
    David S. Investor from Prairieville, Louisiana
    Replied 10 months ago
    Although S Corp is a tax designation, I think that should be brought up in the conversation since it is a popular choice among real estate investors. Therefore, a fifth type of LLC can be presented as a LLC filing taxes as a S Corp. In this scenario, the LLC S-Corp files a 1120S and issues K-1’s to the shareholders file with their regular tax return. The S Corp status mandates that someone is issued a W-2 for a reasonable salary. What is leftover in profits after the W-2 is issued as distributions listed on the K-1. A reason this setup is used is that self employment taxes of 15.3 percent is paid on the W-2 income but not the distribution (K-1) income.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Hi David! Yes, that is certainly one way to look at it. I stuck with LLCs for this article because this is what I get the most questions about, but if there’s interest in S-Corps I’m happy to write about them in the future. S-corps can also be taxed as pass-through entities. What is best will totally depend on the investor’s circumstances, time, asset value and number of assets, partnerships and other stakeholders in their investments, and how they structure their deals. And, of course, the opinion of that particular investor’s professionals is a consideration as well. Thanks for contributing to the conversation–this is certainly a possibility that may suit some investors.
    Bryan Melius from Brevard County, FL
    Replied 10 months ago
    You did it again Scott, another informative article covering different aspects of a LLC. Please do write more about the S-Corps! The best part about your posts are your readers’ questions and concerns that you are able to address. I have a question regarding the Series LLC and the option to have an attorney as your registered agent of the trust. My understanding, as brief as I can make it, is that a major benefit of a series LLC is that it protects each asset in a “child” LLC. If investor X decides to hire an attorney as their registered agent, than tenant y’s opposing attorney will be deterred to pursue a lawsuit due to the difficulty of finding the person liable of whatever damages they are claiming took place at 123 Main Street LLC. If the child LLC is in place to protect the asset and does not have any dealings with the general public, then who would be liable when an investor buys a property, hires property managers, balances books, etc.? I understood there are ways to stay anonymous such as purchasing a property and transferring it to a land trust and making the series LLC it’s beneficiary, but at what point is the investor’s business dealings with sellers, buyers, contractors, and property managers going to make them liable? I believe I read in one of your posts that a separate LLC could be made for the investors’ business dealings, but I do not believe I clearly understood what you were trying to convey. How can investors protect themselves in the obvious roles that require making contact with the public? Will all business dealings ultimately be made by the registered agent? I understand that when using a series LLC that bookkeeping is imperative, but how is an investor able to have access to cash flow or equity for their personal use, or reinvesting profits to buy other properties when each asset’s income and expenses are restricted to reflect each individual entity? Another question I have is what is stopping everyone from basing their LLC’s out of states like Delaware, Nevada, or Texas? Is there an underlying risk or a con if an investor has all their investment properties in California with a registered agent of their trust being located in Texas? Such as their attorney not being familiar with the laws and tax laws that govern California?
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Hello Bryan, Let me try to answer as many of your questions as possible. Let me know if I’m missing anything. Your understanding of the Series LLC’s detterrant power is correct. One detail I’d like to clarify is that the attorney is the Registered Agent for the out-of-state entity, not the trust. Your attorney is a great pick for helping you form trusts as well, but will serve in a different role depending on the type of trust (Agent, Anonymous Land, Estate Planning Living Trusts, etc.). But the protection principle remains the same. A registered agent’s duties are simply to receive and respond to any legal correspondence for the entity. The RA doesn’t actually control the entity. Does that make sense? Here’s a bit more info about RAs for your out-of-state LLC that should answer some of your questions: https://www.biggerpockets.com/renewsblog/all-about-registered-agents-for-your-out-of-state-llc/ You are also correct that your asset-holding company (Series LLC) should not do business with the public. The concept you’re alluding to is a shell corporation, typically an entirely separate LLC. This company owns no assets whatsoever but does conduct business with the public. You can enter into contracts with property managers, etc., using the shell company. In the event anyone ever attempts to sue that shell company, it owns NOTHING–again, making the lawsuit a waste of time for opposing counsel for exactly the reasons you spoke about above. Some investors choose to handle matters like collecting rents personally, but frankly, the shell company offers greater protection. What’s stopping investors from forming out-of-state LLCs? Well, usually the fact that they aren’t aware of the benefits. To address this detail, I actually have another article coming out on this exact subject tomorrow here on BP. An attorney’s lack of familiarity with these options could stem from lots of things–perhaps the attorney knows entities well but doesn’t serve a lot of real estate investor. The reasons could be endless, but the bottom line is there is no “catch.” In my view, this is all the more reason to go with an attorney who works with investors regularly, or even better, also invests in real estate themselves. I hope that helps and thanks for your kind words and thoughtful contributions to this discussion!
    Richard Salvador
    Replied 10 months ago
    Overall a good article. When I created my first LLC in Arizona through the Arizona Corporation Commission Website after some guidance from my CPA, the website actually guided my very well as to which LLC was best for the end result that I wanted to accomplish. As my business grows, I can change it to a different entity.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Richard, Sounds like you used your professionals appropriately. And yes, you can absolutely add an asset holding company like a Series LLC or do some restructuring down the line. This might be a good idea if you anticipate growing your business, as that entity is far easier to scale up. Pooling multiple properties in a Traditional LLC leaves them ALL vulnerable in the event of a lawsuit. I do tend to recommend that investors get a “dream team” together including both a CPA and an attorney well-versed on these issues. Your choice to inform yourself ahead of time was wise and is a great habit to be in! Not only will that help you know what questions to ask, but it can also assist you in making the most of your time with your chosen professionals.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Richard, Sounds like you used your professionals appropriately. And yes, you can absolutely add an asset holding company like a Series LLC or do some restructuring down the line. This might be a good idea if you anticipate growing your business, as that entity is far easier to scale up. Pooling multiple properties in a Traditional LLC leaves them ALL vulnerable in the event of a lawsuit. I do tend to recommend that investors get a “dream team” together including both a CPA and an attorney well-versed on these issues. Your choice to inform yourself ahead of time was wise and is a great habit to be in! Not only will that help you know what questions to ask, but it can also assist you in making the most of your time with your chosen professionals.
    David Livingston Investor from Kansas City, Missouri
    Replied 10 months ago
    This article is very helpful and right on time for my current LLC organization. Thanks for the information.
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    You bet David! Let me know if you have any additional questions and I’m happy to help.
    James Miller Attorney from Fort Worth, Texas
    Replied 10 months ago
    Article has it backwards on husband and wife LLCs. It’s only the community property states they can elect either partnership or disregarded status. Non community property states husband and wife LLCs are taxed as partnerships.
    Costin I. Rental Property Investor from Round Rock, TX
    Replied 10 months ago
    That’s how I knew it too – in community states, multi-member LLCs with husband and wife as the members, are considered disregarded entities, unless elected for a different taxation. Scott, can you clarify?
    Patrick Goebel from New Braunfels, Texas
    Replied 9 months ago
    Thanks for rebuttal on this James. I was concerned and confused as I just set up a Single LLC in Texas and signed up both of us (Husband/Wife) and did not think we were required to do the partnership. We checked? the disregarded entity on the submission form.
    James Miller Attorney from Fort Worth, Texas
    Replied 9 months ago
    You’re welcome. 🙂
    James Miller Attorney from Fort Worth, Texas
    Replied 10 months ago
    Article also omits LLCs taxed as S-Corp and LLC taxes as C-Corp.
    James Miller Attorney from Fort Worth, Texas
    Replied 10 months ago
    Article also omits LLCs taxed as S-Corp and LLC taxes as C-Corp. Reply Report comment
    Curt Smith Rental Property Investor from Clarkston, GA
    Replied 10 months ago
    Tnx, someone mentioned the omission of LLC taxed as S-corp, and it was glossed over that multimember has to file 1065 partnership return. Last year I formed a husband – wife LLC and moved all rentals into land trusts with beneficial interests being the LLC, just to move the Sched E’s off our 1040 and up into the 1065, where audits are very very rare. Just rental income falling down onto the 1040 via the K-1s one for each of us… This was to reduce audit risk souly. Prior year we moved our rentals held in Equity Trust SD-IRA (we hate Equity trust more than eating poop!!! so many reasons) we spent quit abit of time and $$ setting up a solo-401k under our LLC / S-corp property managment co, and moved the deeds from Equity Trust to the LLC for each of our solo-401ks. Solo-k has a much much reduced audit risk vs SD-IRA… Plus we dumped an idiot administrator (equity trust) and moved to a self administered our own checking account solo-k. Yes if one understands how things work, useful things can be done with entities, trusts, and tax strategies that don’t cost much and aren’t that complicated once you understand how it all works. Thanks for a high level blog and the comments filled in some missing parts. 🙂
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    Hi there! I tried to keep this fairly basic and focused on types of LLCs. S-corp taxation is definitely deserving of an article all its own. I did not realize there would be so much interest! For those asking about S-Corps, there are certain situations where they’re advantageous. But I’ve found most investors are more suitable to LLCs. I’m happy to write more about this subject in the future, but those wanting to tax an LLC as an S-Corp should seek advice from an appropriate professional to ensure this is the best choice for their business. Investors wishing to file as an S-Corp will need to fill out IRS form 2553, and possibly a separate form if converting the status of an existing LLC. There are lots of variables here, including under what circumstances an investor may choose to do this. These can range from everything from payroll management flexibility to saving on Medicare/SS taxes. I didn’t want to muddy the waters of this particular article diving into all of these nuances, but since there’s interest, I could certainly elaborate on this topic in the future. I hope this clarifies to some of those who wanted more info on this option.
    Michael Dworman Real Estate Investor from Newton, Massachusetts
    Replied 10 months ago
    Agreed, it is backwards, with community property states, husband and wife can be treated as one.
    Roger G Zorn
    Replied 10 months ago
    Excellent article with plenty of food for thought! I’m just starting to do research with a plan to start investing in the next year and a half or so, after building a base of funds. This gave me some great information in preparation for asset protection!
    Moty Wall from Cincinnati, Ohio
    Replied 10 months ago
    Thanks for the educational article. As a green card holder, not citizen, I am worried about the EstateTaxes. Is any one of the LLC gives a better protection? Can you recommend a strategy?
    Moty Wall from Cincinnati, Ohio
    Replied 10 months ago
    Thanks for the educational article. As a green card holder, not citizen, I am worried about the EstateTaxes. Is any one of the LLC gives a better protection? Can you recommend a strategy?
    Scott Smith Attorney from Austin, TX
    Replied 10 months ago
    You’re very welcome, Moty! Could you clarify your question a little bit? Are you asking if there’s a particular type of LLC that gives greater tax relief? I believe the Series LLC gives greater asset protection for the average investor, but I don’t know your personal situation well enough to give a formal recommendation. I’m happy to answer your questions, though.
    David Valadez Real Estate Investor from Del Rio, Texas
    Replied 9 months ago
    In Texas a community state you can treat the LLC as a disregarded entity for federal tax purposes and SCEDULE E income or losses of rental property.
    Roderick Mills Jr. from Cincinnati, OH
    Replied 6 months ago
    Great article. I will have to look into the rules for multiple member LLC for Ohio