What is the best form of business for a real estate investing business to maximize gains and minimize taxes if I were to go solo? Should do an LLC, Corporation, or just a Sole-Proprietor? What if I had partners?
Our experience going solo is to stick with a sole-proprietor. The cost of setting up and maintaining an LLC usually negates any kind of savings that you get. You do not get a whole lot of extra liability protection either and umbrella liability insurance policies are so cheap it is easier to do that to protect your personal assets. If you have the majority of your assetts in properties owned through the LLC then you are not really getting much protection anyway.
With partners, that is a different story. We run two LLC's for the flip properties that we do with multiple investors in each. Mainly the LLC is there to formalize the relationship and keep everything open and even between investors. It is extra work to maintain the LLC but we feel it is required since there is much more money at stake and we want all the investors to understand what they are getting into.
@Jerry Poon - I usually coach newbies to ignore all of the "entity" stuff in the beginning and spend your time finding great deals instead. Even if you do so with a partner, there are ways to do it without an entity. But do talk with a good insurance agent and make sure that you are adequately covered. Disclosure: I am not an attorney or a CPA, and do not take this as legal or tax advice. If you want legal or tax advice in this area, please consult with the appropriate professionals.
There is an argument for S corp over LLC or LLC taxed as a S Corp.
If you're on your own, the LLC won't help you much. A big benefit of an LLC is the limited liability (the LL in LLC). If you do get sued, the prosecutor can "pierce the veil" of the LLC, eliminating the limited liability and getting at your personal assets.
If you have partners, I think having an LLC for each property would work well. LLCs are easy to set up, and having each property in its own LLC would allow you and your investors to take different stakes in different properties. It would also protect different houses from each other in case of lawsuits. Of course, you'll pay more in registration fees and will have to deal with more paperwork, so there is a downside to that strategy.
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LLC's can give you the protection of an LLC (tough to reach personal assets) and can avoid the "double taxation" of the traditional corporation. (although you can lower the tax bill with smart dividend usage).
Insurance can replace the protection of a corporation to a limited extent, but you should sit down with a California attorney to discuss those issues (you can incorporate yourself)
Starting an LLC isn't that difficult but it all depends on your risk tolerance.
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@Ryan Tyler raises a good point. Corporations (C and S) pay corporate income tax, and you pay individual income tax, so you effectively pay taxes twice on your earnings. LLCs are flow-through entities; only the shareholders pay taxes.
As a person who saw his family's property just get sued and held the property in an LLC, the insurance is more important. However, I don't see the downside of an LLC if not too costly. There is privacy with an llc. If it is a single person llC, it is a disregarded entity for income tax purposes. In terms of the lawsuit, there was never a risk of piercing the corporate veil. Anyway, we have been good at keeping up with the formalities so it would have been a stretch. Is it a must have? No. Is being properly insured a must have? Yes.
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