LLC as an S Corp

8 Replies

Hello BP Community

I have a question and hope to get as many answers and opinions as possible.

Has anyone registered an LLC but elected to be treated as an S corporation? I have read about this in many sites and also heard this in a seminar I assisted a few weeks ago. I'm getting ready to register my company but looking for what my best option is.

I had a domestic LLC incorporated in NJ over the summer and filed for s-election status for my flips. It's simple to do and if you go to the state website, they have step by step instructions on the steps you need to take. Let me know if you have any questions.

I think you have it backwards. LLCs are always treated as "pass through entities" meaning that the taxes on gains/losses are "passed through" to the individual.

Corporations (or "C" Corporations) pay taxes on their net income, and then their shareholders pay taxes again when they receive their share aka dividend. This is known as "double taxation"

S-Corporations are regular "C" corporations but is taxed as an LLC, meaning the net income is not taxed at the corporation level but is "passed through" to the individual owners/members.

If you want to create an S-Corporation, you file for a C Corporation, and once filed, you fill out a form electing S-Corp status. 

That being said, it's probably best you stick with LLCs for real estate investing. There is no real benefit for S-Corp's for real estate (other than issuing stock). If you are doing flips or being really active in real estate like wholesaling, then maybe look at an S-Corp as there is some benefit by bypassing self-employment tax by paying yourself on salary. Also note that the reporting requirements are much more stringent with S-Corps (annual meetings, recording minutes, etc)

Maybe it's different in Jersey, but what I just stated is generally the same for the entire country. 

One thing to keep in mind with S-Corporations is that when your descendants inherit you S-Corporation, any gain in the sale of the assets (i.e. the properties) will be taxed based off the profit they generated. With an LLC your descendant will get a new cost basis and not have to pay taxes on the profit. For that reason I would advise against an S-Corporation.

I struggled with this for a long time as everyone I asked they gave me a different answer which you can see for the 100's of posts just here alone on BP. I never saw so many different opinions on a topic. The answer depends on what you are going to do; (Fix & Flip; Buy & Hold; what you are going to do with your business; retirement plan ? etc.) 

I spent too long deciding what to do; where I should have just picked the best entity that I could and just go with it. You can always change your mind and open up something else later if you find for some reason you need to adjust.

The way I decided it was to just read a lot and then the most important step is to finally talk to your attorney and your CPA with real estate experience and tell them what you want to do; and let them help guide you what works for you for your specific situation and your goals. 

Even though an LLC is a "pass through entity" you actually do get to elect what type of taxation (schedule C, Scorp, etc.) so that is an important point. I'm not sure if all the complexities of a corporation come into play if you are an LLC and you elect to be taxed as SCORP. I know that being an SCORP is NOT the way to go for buy and hold rental real estate in most cases, but can be ideal for flips where short term gains are treated as ordinary income.

Originally posted by @Account Closed :

I think you have it backwards. LLCs are always treated as "pass through entities" meaning that the taxes on gains/losses are "passed through" to the individual.

Corporations (or "C" Corporations) pay taxes on their net income, and then their shareholders pay taxes again when they receive their share aka dividend. This is known as "double taxation"

S-Corporations are regular "C" corporations but is taxed as an LLC, meaning the net income is not taxed at the corporation level but is "passed through" to the individual owners/members.

If you want to create an S-Corporation, you file for a C Corporation, and once filed, you fill out a form electing S-Corp status. 

You actually can do it either way. Create either a C-Corp or an LLC, then file the form to elect to treat either type of entity as an S-Corp

Originally posted by @Linda Weygant :
Originally posted by @Sajju Shah:

I think you have it backwards. LLCs are always treated as "pass through entities" meaning that the taxes on gains/losses are "passed through" to the individual.

Corporations (or "C" Corporations) pay taxes on their net income, and then their shareholders pay taxes again when they receive their share aka dividend. This is known as "double taxation"

S-Corporations are regular "C" corporations but is taxed as an LLC, meaning the net income is not taxed at the corporation level but is "passed through" to the individual owners/members.

If you want to create an S-Corporation, you file for a C Corporation, and once filed, you fill out a form electing S-Corp status. 

You actually can do it either way. Create either a C-Corp or an LLC, then file the form to elect to treat either type of entity as an S-Corp

 Well I definitely won't argue the matter with a CPA!

Holding property for rentals in an S-Corp is generally a bad idea.

A - the passive nature of rental income can lose it's tax advantaged status in an S-Corp and become taxed as regular earned income.  But not always.

B - too much passive income in an S-Corp can cause it to lose it's Subchapter S status and revert to either a C-Corp or an LLC. But not always.

C - there are increased recordkeeping requirements in an S-Corp vs an LLC.

D - S-Corps are generally required to have a salary component involved.

E - sales of property within an LLC can lose its favorable capital gains status. But not always.

Buying and holding in an S-Corp is not for the novice.  Transactions have to be done in a "just so" manner in order to keep their original statuses and a wrong move can have a disastrous tax consequence.

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