S Corp or Series LLC: Which Is Best for Your Business?

Blog Business ManagementLLC vs. S Corporation: Which Is Better for Real Estate?

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Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.

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Because protecting personal assets from liability is an important consideration when starting a new business, many self-employed real estate investors organize their companies as a type of corporation or limited liability company (LLC). Two common choices among small business owners are S corps and series LLCs.

I help my clients set these up to protect their assets, plan their estates, and help avoid paying unnecessary taxes. While your unique situation may call for a customized approach, I’ve put together this quick guide to help you decide whether an S corp or series LLC is the best business structure for your new venture.

S Corporations and Series LLCs: What Are the Differences?

While there are many similarities between S corps and series LLCs, there are some critical differences between the two options.

Tax Status vs. Entity Type

The S corporation, or S corp for short, is not a type of legal entity but a tax status that the IRS can grant a corporation. On the other hand, series LLCs are a type of business entity created by state law.

Fun side note: LLCs can also choose for the IRS to tax them as S corporations. For this guide, I decided to focus on corporations with S corp tax status.

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Shareholders vs. Members

Since S corps are corporations, they are owned by shareholders, whereas series LLC owners are called members. The IRS places the following restrictions on S corporation ownership:

An S corporation cannot have more than 100 shareholders.
S corp shareholders must be U.S. citizens or residents.
An S corp cannot be owned by LLCs, corporations, partnerships, or many types of trusts.

Conversely, series LLCs can be owned by an unlimited number of members and can have unlimited subsidiaries and series.

Board of Directors vs. Managers

As corporations, S corps must be managed by a board of directors and officers. With a series LLC, the owners can manage the company themselves or hire someone else to run the business.

Required Formal Process vs. No Required Formal Processes

Like all corporations, an S Corp must abide by statutorily-required formalities to maintain its corporate status. Examples of common corporate formalities include:

Creating and following bylaws
Issuing stock or shares
Holding at least one shareholders’ meeting each year
Taking minutes
Keeping accurate records

A series LLC and its series are not required by law to follow these types of formalities. However, the IRS does recommend that LLCs follow an operating agreement, hold annual meetings, and document all significant decisions.

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S Corps and Series LLCs: What Are the Benefits?

While S corporations and series LLCs have their differences, they can offer similar benefits to real estate investors.

Liability Protection

Both S corps and series LLCs offer their owners protection from personal liability for the business’ debts. Corporations and LLCs are considered separate legal entities from their owners. This means that the business’s creditors cannot go after the owner’s personal assets to pay company debts.

With a series LLC, you also enjoy asset protection between series. A creditor cannot access the property of one series to pay the debts of the other.

Pass-Through Taxation

Standard corporations, which are also called C corporations or C corps, are subject to double taxation. The corporation pays income tax on the profits, and then shareholders must also pay income taxes on the dividends they receive.

Both S corps and series LLCs are pass-through tax entities. This means that the company does not have to pay corporate income tax, but its profits or losses are “passed-through” and recorded as the owners’ personal income. With pass-through entities, income taxes are paid by shareholders or the LLC members on their individual tax returns, not by the business.

S Corps vs. Series LLC: What You Need to Know

Unfortunately, the answer to this question is not black and white. Deciding between forming your new business as an S corp or a series LLC can be confusing, especially when both options offer similar benefits. The choice is ultimately a personal one and will usually hinge on how you want your business to function. There will always be pros and cons to any decision, so make sure you take your time and consult with an attorney if you need help.

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.

Questions? Comments?

Join the discussion below.

By Scott Smith

Scott Royal Smith is an asset protection attorney and long-time real estate investor. His law firm, Royal Legal Solutions, helps thousands of real estate investors and entrepreneurs in all 50 states protect more than $1.2 billion in assets. Since 2014, he has published over 1,000 posts and articles on BiggerPockets and has appeared on hundreds of podcasts.

22 Replies

Logan Hassinger Specialist from Fort Worth, TX

Replied about 1 month ago

I know you couldn’t go into too many of the tax benefits of an S-Corp because everyone’s situation is different. For us and with the help of my CPA, my decision to change my tax filing status of my LLC to an S-Corp was based on a few things: 1. General rule of thumb is to have a annual net profit of 40k. 2. Manage my SE tax liability 3. Incorporate a solo 401k for additional tax savings and deferred growth 4. Incorporate a healthcare plan 5. Generate a w-2 for for traditional loan purposes

Jac Madsen from SLC, UT

Replied 26 days ago

This is great insight. A little extra work unlocks a lot of benefits for those not working a traditional 9-5 to support their real estate ventures.

Sterling Porter from Stone Mountain, GA

Replied about 1 month ago

As a CPA I agree with Logan's CPA above. The S Corp does require the Shareholder/Officer to have "reasonable compensation" which is determined based on several metrics (mainly what someone in your position will be paid). This means you have to issue yourself a W2 and pay payroll taxes. However it does open up opportunities to plan for and lower taxes that may not be available under an LLC including; contributing to retirement, setting up a health plan, etc. I only suggest the S Corp to my clients if the business income is high enough to justify it based on the compensation requirement. Otherwise an LLC should suffice.

Kay E. from Winter Garden, Florida

Replied about 1 month ago

Is there a certain time of the year or deadline when one must apply to change their tax classification to an S-Corp? Does the change take place immediately once submitted?

Sterling Porter from Stone Mountain, GA

Replied about 1 month ago

If you already have an LLC set up, you can apply for S Corp status retroactively as far back as three years and 75 days from the year in which you would like to be recognized as an S-Corp. With my LLC clients who want to move to an S Corp for 2020, they can still do it. We just need to make sure they can meet the reasonable compensation requirement before the last payroll returns are due. Hope this helps.

Chuck A. Investor from Indianapolis, Indiana

Replied about 1 month ago

@Sterling Porter - Currently I have several properties in one LLC, but thinking of moving to a series LLC (to keep the liability of each property separate) . The properties are in Indiana which allows the formation of a Series LLC, but advise from local processionals is not to move to a Series LLC as it is still relatively new and not tested in the courts. What are your thoughts ? and also Do you have to maintain separate books and file separate taxes for each series for a Series LLC ? Thanks !

Joseph M. Rental Property Investor from Sacramento Area, CA

Replied about 1 month ago

If you are a member of an LLC, you can contribute to retirement. LLC's are allowed to have a 401K plan. In fact, our is a self-directed 401K. One account for each member. With a self-directed retirement plan, you can then invest in other non-stock investments...like real estate. Buy or flip in your 401K and no need for a 1031x! Just all rents and expenses must stay within the 401K. Also great for land banking! Been doing it for years.

Earl Roberts New to Real Estate from Orlando, Florida

Replied 21 days ago

Thank You for this helpful tip!

Bob Galivan Real Estate Broker from Cleveland, Ohio

Replied about 1 month ago

You state in the article that "The S corporation, or S corp for short, is not a type of legal entity but a tax status that the IRS can grant a corporation. On the other hand, series LLCs are a type of business entity created by state law." I believe that an "S" Corp is as much of an entity as a "C" corp, LLC, Series LLC, etc. Like LLC's, income from an "S" corp passes through to the shareholders and is not taxed within that corporate structure. With regard to Series LLC's, these entities are not recgonized in most states. While it is possible to form a series LLC in states where they have been designated by legislation, non-series LLC states may not recgonize the liability protection they purport to offer. In my opinion, until all states grant legal status to the series LLC, it is risky to use them outside the states that have authorized them. I believe those states are Deleware, Illinois, Iowa, Nevada, Oklahoma, Tennessee, Texas, Utah and Puerto Rico.

Kay E. from Winter Garden, Florida

Replied about 1 month ago

Is there a certain time of the year or deadline when one must apply to change their tax classification to an S-Corp? Does the change take place immediately once submitted?

Jeremy Schwindt

Replied about 1 month ago

The form 2553 needs to be filed within 90 days of the year. There is something called a late election but this is something you should use a CPA to advise you on.

Travis Bovy from Jesup, Iowa

Replied about 1 month ago

Form 2553 needs to be filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. After the IRS processes the form, they will send you a letter stating if you were approved or not.

Ludi Levi

Replied about 1 month ago

I was advised as foreign national to open CORP and LP or LLC (Corp for managing the property and the LLC/LP for purchase the property) please advise from your own experience Do I really need 2 entities ?

Andy Crooks Real Estate Broker from Verona, WI

Replied about 1 month ago

I didn’t see mentioned what I see as one of the biggest benefits of the S Corp. if you pay the “reasonable compensation” any profit above the annual salaries could be passed as a distribution at likely a more advantageous tax treatment. Does anyone disagree with that sentiment?

Jeremy Schwindt

Replied about 1 month ago

That's the best part about being an S corp!!!

Sterling Porter from Stone Mountain, GA

Replied about 1 month ago

I agree as long as the compensation is reasonable. You also get the same benefit as an LLC. What makes the S Corp better is that the net income is not subject to self employment (SE) tax. LLC income is subject to SE tax.

Jeremy Schwindt

Replied about 1 month ago

If it's a passive rental you're not going to be paying SE tax on the income which is the main reason you would form an S corp. I wish this article would've emphasized this more because as a rule of thumb for a small real estate investor an S corp is not a great option. In my opinion if you own a large number of very profitable properties an S corp could maybe help managing your effective tax rate but it's one of many strategies you could use. You could create a C corp and use a self directed IRA to buy those shares and with that capital invest in another property (and continually keep investing in the IRA thus getting a tax deferral). You could 1099NEC (used to be 1099MISC) yourself to try and boost your social security income down the road. (Might want a good actuary for this one.)

Lisa O'Dell from Salida, Colorado

Replied about 1 month ago

Does it get complicated to form an S-corp or LLC if you have a mortgage and corresponding property insurance in your name as an individual? For instance, if you recently formed a business specifically to buy rental investments, is it possible to qualify for a mortgage? If the property was purchased by an indivudual then changed into an S-corp or LLC, can the mortgage company require the mortgage "due-in-full?" Additionally, will the insurance company write a policy for the same cost as for an individual? People may want to know the answers to these questions before jumping into forming a business. A high-dollar umbrella policy is a good idea, too.

Monty Henson

Replied about 1 month ago

This short note is obviously confusing to readers since the comments are confused either readers are not reading what is stated in the note or do not understand the terms. Scott Smith uses terms that are confusing and could have been avoided by a better explanation. One reason is a LLC (including States that have Series LLCs) is a disregarded entity with the IRS and one must file an election on how they wish to be taxed. It has noting to do with the type of business or what entity they were formed in their State. C-Corporation election, S-Corporation election, Partnership election or Sole Proprietorship (a disregarded entity by IRS) are IRS income tax elections one makes with the IRS not the State you do business in. These have nothing to do with form the formal business entity with your State's Secretary of State or Corporations Agency. A Corporation is a Corporation and a Limited Liability Company or a Series Limited Liability Company is a Company. A Corporation is NOT a Company and vice versa. Use the correct terms for each. The article also ignores current tax law that needs to be considered for real estate investors pursuant to the Tax Cut and Jobs Act of 2017. TCJA of 20!7 favors real estate investors but you need to work with a tax planning expert to minimize taxes and maximize benefits (deductions) for your business election. However, a tax planning expert is not a legal entity expert unless they are also a licensed attorney, it's a felony in my State (Texas) for a non-licensed person to dispense legal advice. Work with both. A Corporation should never own its assets inside the Corporation for legal reasons nothing to do with income tax planning. I can sue a Corporation and if I win I can get liens on corporate assets or turnover proceeding against the cash accounts. Partnerships, LLCs and Series of a Series LLC cannot have liens placed on its assets. They all have charging order protection. Tax planning: For example would your LLC or a Series of a Series LLC benefit for election as a C-Corporation? Max tax on C-Corporation is 21%, is your personal tax rate higher? If so why would your choose to be taxed as an S-Corporation or a Partnership? (pass through entities) if your personal income tax rate is much higher than 21%? Again, careful planning throughout the year can mean a C-Corporation is not double taxed. There is no tax paid if corporate income is negative or $0. The TCJA of 2017 provides real estate investors with a lot of bonus depreciation if income tax election is a S-Corporation election, that a C-Corporation income tax election does not provide. Again, you need to be asking a tax planning expert. Moreover, depending on the type of business you are in business are in may benefit from election of one type over another. For example, one Series of a Series LLC elects to be taxed a C-Corporation because it is better income tax planning for the individual type of business owned by the Series, while another Series is a type of business that may benefit by being taxed as an S-Corporation and the (members are eligible) like a real estate investment in a multifamily because of the bonus depreciation and other income tax benefits. A third Series of the Series LLC is a oil and gas deal that the tax planning expert states it is best to be taxed as a partnership. By my State's statute each Series of a Series LLC is legally segregated from the other Series and each Series may have its own members and own managers that are not part of the other Series of the Series LLC. I hope this helps some investors confusion regarding the choice of formal business entity formation in their State and choice of income tax election with the IRS. These are mutually exclusive.

Richard Damian Rental Property Investor from Houston, TX

Replied about 1 month ago

can a high dollar umbrella policy be used instead of an LLC ?

Colin Newberry

Replied about 1 month ago

There is so much misleading or incorrect about this article. There is no either/or choice between S-Corp and Series LLC. There is a legal entity choice, and then subsequent to that you make a tax election. To put as succinctly as possible. A legal entity's structure is independent from its tax status. Either a Limited Liability Company or a Corporation would be the most common entity structures for most investors. Once you have formed your legal entity for liability purposes, you can then make a tax status election, wherein an LLC or Corporation can be taxed as a partnership, an S-Corp, a C-Corp, or even a disregarded entity (yes, the tax status terminology is moronically identical to the entity designations, but they are not the same). If you are considering investing a down payment on a six figure real estate investment, please do yourself the favor of gathering a team professionals in both the legal and tax world to aid and education on what is best for both liability and tax planning purposes.

Mauricio Alfonso

Replied about 1 month ago

I am surprised real estate and corporations are even mentioned together. Generally speaking, it is never a good idea to hold real estate in a s-corporation or c-corporation. Holding appreciating assets (which real estate usually is) in a corporation is never ideal because getting assets out and into a corporation (s-corporation) has more tax implications than LLCs (partnerships). You can freely move assets (real estate) in and out of partnerships (LLCs) with very little tax consequences. Moving assets (real estate) in and out of corporations usually could trigger tax implications. This is why s-corporations (or c-corporations) are usually not a good vehicle to hold appreciable assets, especially real estate.

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