LLC or sole proprietor?
Castleton On Hudson, NY · Member since 2015 · 15 posts · 2 votes
Well... I have been talking about if for years. I think for many, a may have sounded more like a talker and not a do-er. I'll be closing on my first 2 unit in a week or so. I just went ahead with the formation of an LLC. I'm doing a cash deal and am wondering if I should form as an LLC or sole? I wan't to do it soon as I want to purchase the property with the business name. I read somewhere that you're supposed to strictly keep personal and business funds separate. Do I just purchase the property with personal money and put it the business name, or transfer the property over after.
Hi @Account Closed
I am not a CPA or a Lawyer, but I've done the research hundreds of times and here is my personal opinion based on my research:
From accounting perspective:
If you plan to flip, use an S-Corp or an LLC taxed as an S-Corp for (better flexibility).
For buy & hold, if you are making too much money and if you hold many properties under the same entity, You need S-Corp or an LLC taxed as an S-Corp. If you are loosing money "on paper), or if the income is not significant, stick with the LLC.
If you form a single member LLC, IRS will treat you as a disregarded entity and you will be taxed as a sole proprietor. If you form an S-Corp, the IRS expects that you receive a minimum reasonable salary (pay payroll tax), and whatever profit left you can take as a distribution (no payroll tax).
From Liability perspective:
It is never enough protection to hold a property inside an entity aka "Outside protection". You also need to protect your assets from the inside as well. When you hold a property in an entity, your personal assets might be protected from your tenants or any liability litigation you might face for owning that property, but if you, your kids or your wife get in personal liability litigation for something such as a car accident, or a fight,, there is a chance that you'll never see your personal assets again including your property that you hold in an LLC.
Umbrella policy is never enough. I strongly recommend working with a good asset protection lawyer in your area.
Business VS Personal
What you heard about strictly keeping personal and business funds separate is true. No matter what entity do you form or even if you decide to go as a sole, you need to separate your business funds/expenses/etc from personal. It will make your life easier and you will have better chance surviving an audit.
When I buy a property, usually i fund my LLC (wire money from personal account to business account) and record it as either a loan to my business or a contribution. Any generated income or accrued expenses as a result of owning that property should go through my business checking account or business credit card. Your accountant will be able to easily link your business credit card and checking accounts to your accounting software such as Quickbooks and easily maintain your books.
If I don't separate personal from business, it will be a huge mess and I will never be able to get my books right. Also remember that many real estate buy & hold investors prefer to form an entity per each property. How else would you know if your property is profiting or losing money?
Hi Rob,
From an accounting/tax perspective, it doesn't matter too much whether you purchase the property in your name or the business's name. You can make a capital contribution to the LLC of either the money to purchase the property, or the property itself after it is purchased. In this circumstance, that is a tax-free transaction.
However, as you begin operating your business you will need to have separate bank accounts for your LLC and your personal funds. Be very careful that you do not commingle funds as that can could you your limited liability protection (the main reason to form an LLC in the first place).
@Steve B
@Steve B. exactly my point. There is alot of pressure in our industry to form LLC to somehow validate our commitment or seriousness to the business!
I am speaking from personal experiences! Educate yourself the pitfalls and benefits so when good meaning professionials tell your you wrong and that your putting your entire families existence at risk. Your armed with knowledge to defend your choices!
Hi @Account Closed
I am not a CPA or a Lawyer, but I've done the research hundreds of times and here is my personal opinion based on my research:
From accounting perspective:
If you plan to flip, use an S-Corp or an LLC taxed as an S-Corp for (better flexibility).
For buy & hold, if you are making too much money and if you hold many properties under the same entity, You need S-Corp or an LLC taxed as an S-Corp. If you are loosing money "on paper), or if the income is not significant, stick with the LLC.
If you form a single member LLC, IRS will treat you as a disregarded entity and you will be taxed as a sole proprietor. If you form an S-Corp, the IRS expects that you receive a minimum reasonable salary (pay payroll tax), and whatever profit left you can take as a distribution (no payroll tax).
From Liability perspective:
It is never enough protection to hold a property inside an entity aka "Outside protection". You also need to protect your assets from the inside as well. When you hold a property in an entity, your personal assets might be protected from your tenants or any liability litigation you might face for owning that property, but if you, your kids or your wife get in personal liability litigation for something such as a car accident, or a fight,, there is a chance that you'll never see your personal assets again including your property that you hold in an LLC.
Umbrella policy is never enough. I strongly recommend working with a good asset protection lawyer in your area.
Business VS Personal
What you heard about strictly keeping personal and business funds separate is true. No matter what entity do you form or even if you decide to go as a sole, you need to separate your business funds/expenses/etc from personal. It will make your life easier and you will have better chance surviving an audit.
When I buy a property, usually i fund my LLC (wire money from personal account to business account) and record it as either a loan to my business or a contribution. Any generated income or accrued expenses as a result of owning that property should go through my business checking account or business credit card. Your accountant will be able to easily link your business credit card and checking accounts to your accounting software such as Quickbooks and easily maintain your books.
If I don't separate personal from business, it will be a huge mess and I will never be able to get my books right. Also remember that many real estate buy & hold investors prefer to form an entity per each property. How else would you know if your property is profiting or losing money?
Thank you for all of your input. Between running a painting business, looking for property, spending time with my family, and learning the real estate business, I'm having a hard time keeping up!
Thanks again
Thank you for all of your input. Between running a painting business, looking for property, spending time with my family, and learning the real estate business, I'm having a hard time keeping up!
Thanks again
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