Real Estate Investor · Humble, TX · Member since 2012 · 10 posts · 4 votes
Good afternoon!
We are currently structuring our Real Estate Investment company. There is seemingly a variety of recommendations as for how to establish this entity. Is there any advantage or disadvantage that comes to mind with structuring as a Series LLC. and being recognized by the state as an S-corp for tax purposes?
Is is common practice to have both a Tax attorney on our team as well as a CPA? Likewise if you are in the Houston,TX area do you have a CPA you would recommend?
Thank you in advance for any tips you might suggest!
Each cell of your series may elect a separate status. What type of investing are you doing? Also without knowing your approximate annual income and structure of this income, the entity selection becomes even more difficult.
The S-corp tax status can be very valuable; however, as I said above there is not much there is more or less deductible, mostly it changes where things are deductible. You can pay yourself a "reasonable" salary and then other distributions are taxable strictly as ordinary income.
I don't know why you would need both a tax attorney and an accountant. Your real estate attorney should be able to assist you with general questions on law and your accountant should be able to assist you with the financial ones.
I do not have a recommendation near Houston; however, I will say there are many who provide services nationwide. I do not know about any of the other accountants here on the board; but, I have clients everywhere.
Thank you for your feedback Steven. We are in the initial phase of structuring our business. Our focus is in whoelsaling properties and also rehabbing. Being that we are on the front side of this we have not yet identified our projected annual revenue target.
That is a very important detail to contemplate. Potential profit is what you're looking for. If you don't know how much you can expect you can cause yourself to incur a significant tax bill. This is something you must know before you choose your entity.
Yes I agree this is an important factor. Its my understanding that ultimately the benefit of S-Corp is in large to take advantage of the SE tax. ( I think in TX is capped out at 100k) As such, if our projections for profit exceed 100k, would this then determine if we are eligible to take advantage of the SE tax via S-corp? If in fact we exceed this number would we then be penalised or could we at that time make appropriate modifications as for how we are to be recognised by the state for tax purposes?
Once you make the S election if you terminate the election you cannot make it again for 5 years.
The rules are that you must pay yourself a "reasonable salary" for the profession (of course you should be showing a profit before paying a salary).
You should do some research on how an S corp operates for tax purposes. Because if you do elect this it will be very important to follow certain rules. You could choose a percentage of profits or pay yourself a set hourly wage. Many of my clients pay their salary in December once they know what their year end is going to look like.
You will have to have very significant(Greater than 5mil) earnings to be ineligible to operate as an S-Corporation.
They will only pay Social Security and Medicare on their salary the additional is passed through to them as a distribution which is not subject to SS or Medicare.
As I said before though if you are in a very high tax bracket you may want to consider setting up differently. This is to take advantage of tax rates.
Texas LLCs are subject to a franchise tax. For 2012, that limit is over 800k of annualized revenue. Texas will not be too worried about you.
That may not necessarily be true. In some cases I would recommend a C-Corporation. Especially if the individual is already in a higher tax bracket. If they are not going to be pulling funds out initially to supplement or add to their income it may not be a bad idea. They can pay themselves a salary and then they can have the rest taxed at the rates of the C-corp. This is one of the reasons I love the Series LLC so much. Several C-corps working together can drop your tax bill significantly in some cases. The first 50k is taxed at 15%. If you are in the 33% or higher tax bracket than paying tax on at 15% corporate and 15% personal is a good deal. You also can work toward qualifying for loans with the corporation once you have some seasoning or working assets. There are some other small benefits that you can offer yourself that can be a bit easier to do as a C corp; however, those are well beyond the scope of this discussion.
In some cases I have had one spouse in a partnership with a C corporation owned by a family member while the other happened to be a contract worker for said C corporation. You have to figure out what is best for your situation.
My point is you must figure out what your goals are and then sit down with someone knowledgeable in the topics to determine the best thing to do.
Thank you both for your input. It seems that each CPA and Tax Lawyer we meet with, there are different approaches suggested as for how we best should structure, to maximize savings, minimize risks, and do this the correct way. Lots of moving parts! Based on this feedback I am thinking that to S-corp would be appropriate for my situation. Just doing our own due diligence and exploring each approach, thank you for helping in this regard!
That may not necessarily be true. In some cases I would recommend a C-Corporation. Especially if the individual is already in a higher tax bracket. If they are not going to be pulling funds out initially to supplement or add to their income it may not be a bad idea. They can pay themselves a salary and then they can have the rest taxed at the rates of the C-corp. This is one of the reasons I love the Series LLC so much. Several C-corps working together can drop your tax bill significantly in some cases. The first 50k is taxed at 15%. If you are in the 33% or higher tax bracket than paying tax on at 15% corporate and 15% personal is a good deal. You also can work toward qualifying for loans with the corporation once you have some seasoning or working assets. There are some other small benefits that you can offer yourself that can be a bit easier to do as a C corp; however, those are well beyond the scope of this discussion.
In some cases I have had one spouse in a partnership with a C corporation owned by a family member while the other happened to be a contract worker for said C corporation. You have to figure out what is best for your situation.
My point is you must figure out what your goals are and then sit down with someone knowledgeable in the topics to determine the best thing to do.
-Steven the Tax Guy
How does that apply come taxes time with the different filing fee's, especially in states like CA, and also paperwork wise? Does each separate entity within the series need it's own books, and therefore bank account? I'd assume so?
If one LLC owns the other can you still file as a s-corp? I read you can not file as an S corp if the llc is owed by another llc. How does this work with series llc?