How did you incorporate? C-Corp, S-Corp, LLC??

Goals, Business Plans & Entities
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How did you incorporate? C-Corp, S-Corp, LLC??

Monica Burt
Homeowner · Germantown, TN · Member since 2012 · 7 posts · 0 votes

I am looking to incorporate myself for a variety of reasons before fully engaging in my RE journey. I am curious what option you took for incorporation and why you chose that option. I have an MBA so I know a decent amount about the benefits and disadvantages of each option but I want to know what others in the RE world chose to do. I am just now trying to figure things out but potentially I would like to flip some homes and I would like to broaden my RE portfolio to hold some properties long term and live off (or save or use the cash to continue investing it all depends on my 9-5 situation) of the cash flow so that I can hopefully retire early.

I am assuming that the S-Corp route is the way to go but I am not certain. There are also a variety of ways to get this done online but I am a little nervous about handling something so important via a website. Did you use a website or an attorney and/or an accountant to assist you with your incorporation? I live in TN...just in case you are curious.

Thanks in advance for the advice!

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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
14y

I agree with the above that it depends on your situation, but add that in the beginning the best entity might be no entity at all. I did everything in my own name when I started. Then again, I didn't have much to lose. Good liability insurance is usually sufficient. Once you are really rolling, you'll have your business and strategy better defined and your entity decisions will be more clear.

20+ years and hundreds of deals later I have several entities, of all types, each for a different reason. When I was starting, I didn't need all of the complexity and added expense.

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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  • Mark UpdegraffBusiness Member
    Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 708 votes
    14y

    Create a separate LLC to hold your RE portfolio, and have your property titled to it. I don't think an S-Corp is a good option unless you're going to have payroll, then it could be advantageous. You should not have payroll on the entity that holds the property for liability reasons. If you do need to create a payroll, LLCs also work. I think for the most part, people these days are using LLCs because they are simpler to form and maintain. There is a place for S-Corp, but generally not until things really start to take off. I'm not an expert though... I did create my own LLCs in 2 different states. (PA & NY). It is not hard, and you save a lot of money by doing it yourself. If you're time is just too valuable, by all means pay someone else to do it for you. All depends on where you are in the entrepreneurial process :D For me, a penny saved is a penny earned ;-)

    Good Luck!
    Mark

    Podcast Guest on Show #112
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    2Reply
  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
    14y

    LLC for rentals. Sub S for flipping and wholesaling. Whether you choose a Corp or LLC with an S designation will involve numerous factors.

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    Monica,

    The entity (or multiple entities) which you choose will depend on your situation. Carlos F. gave you a very simple but effective explanation.

    In general you probably don't want to combine you flip properties with you buy and hold properties. Having an entity is only part of it, you need to operate it properly and follow the appropriate formalities.

    Is you concern tax treatment or liability protection? These are sometimes conflicting goals and your accountant may suggest something different from what you attorney suggests.

    You may want to check out NOLO Press. They have self help legal books. I know they have books on LLCs and corporations. I am not necessarily suggesting you do it on your own. However if you choose to work with an attorney you will be more familiar with the various issues and the pros and cons.

    My first LLC was created by an attorney. He used a boilerplate operating agreement that I didn't understand and that he couldn't explain to me. I now create my own and my own operating agreements. But that is because I have taken a lot of time to educate myself and worked with attorneys and a great accountant.

    The last thing I would choose to do would be some online website.

    Good Luck - Ned

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    Monica Burt,

    None of us can tell you what is best for your situation. I have formed many businesses both for myself and for others. From that experience I can tell you each one was VERY different. Different needs for every owner and type of operation. What type of RE work are you planning to engage in?

    Some cases a simple Disregarded LLC can be best to just hold a few properties. I have several LLCs and a management company as this is best for me. My management company is an S-corp. This is because all of my hiring is done from a C-corporation. Meanwhile all of my properties are disregarded to their owner.

    I chose to utilize a Series LLC as this gives me the best option in my location. You have to figure out what your needs and tax situation are in order to choose the most logical. There are MANY threads on here talking about just that. Don't hesitate to ask us if you have any further questions.

    -Steven

    [email protected]224-381-2660
    3Reply
  • Michael Quarles
    Flipper/Rehabber · Bakersfield, CA · Member since 2008 · 3k+ posts · 3k+ votes
    14y

    Monica

    I can't help you with your question.

    However I wanted to say that I think it's cool that you became a member as a pro basic and only have 4 posts(as of this post). It show a frigging ton to me. Great job.

    2Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    14y

    I agree with the above that it depends on your situation, but add that in the beginning the best entity might be no entity at all. I did everything in my own name when I started. Then again, I didn't have much to lose. Good liability insurance is usually sufficient. Once you are really rolling, you'll have your business and strategy better defined and your entity decisions will be more clear.

    20+ years and hundreds of deals later I have several entities, of all types, each for a different reason. When I was starting, I didn't need all of the complexity and added expense.

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    4Reply
  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    14y

    I'd agree with Brian Burke.

    Depending on your current net assets, it may be an OK thing to just invest in your own name. It's pretty easy to move assets to another entity sometime in the future if it's needed.

    Implicit in this advice is the fact that most RE investors never buy their 2nd property. Either they get cold feet and don't get the first, or have bad enough experience on the first that they never want to deal with the 2nd.

    So, my advice is not to sweat the small stuff. And in the beginning what type of entity will hold the properties is small stuff. If you don't have a lot of assets hold it in your own name. If you do set up a simple LLC. Concentrate on getting a great deal for the first one. Because if you don't do well on the first there will never be a 2nd, or a need for an entity to hold it.

    3Reply
  • Watson Smith
    Investor · Peachtree Corners, GA · Member since 2012 · 131 posts · 83 votes
    14y

    I have mine in an S Corp. No double taxation and your allowed vacations... I mean... shareholder meetings anywhere that can be written off. Plus a number of other things. TN? I hope your not a Vols fan..... lol

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    Watson Smith,

    In some cases the S-corp can be beneficial; however, typically the higher the income the greater the benefit the C-corp can be. This is especially important when your properties are showing a positive income.

    As Michael B. and Brian Burke stated you may be better off with no entity in the beginning and just try to find decent deals. In some cases you may be costing yourself more with the LLC or other entity in the beginning.

    -Steven the Tax Guy

    [email protected]224-381-2660
    0Reply
  • Sib Bahjat
    Investor · Colleyville, TX · Member since 2012 · 70 posts · 7 votes
    14y

    I believe everyone brings valid points and tons of great information. In my opinion, you should seek a real estate experienced CPA in your state. They will give you the best advice. Good luck!

    1Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    Sib Bahjat,

    Actually the best option is to have both an attorney and an accountant in front of you to figure out the best option.

    -Steven the Tax Guy

    [email protected]224-381-2660
    2Reply
  • Monica Burt
    OP
    Homeowner · Germantown, TN · Member since 2012 · 7 posts · 0 votes
    14y

    Thanks so much for all of the responses! I think I'll take your advice and keep things simple while I can. However, while I am keeping things simple (not incorporating for now) I will complete my diligence on incorporation so that I know exactly what my next steps are for a variety of potential scenarios. I like the idea of sitting down with both an accountant and attorney (Something about that last statement seems crazy...an accountant and an attorney all in one setting?! Jk )to determine the most value added options for me.

    I can't thank you all enough for chiming in on my thread! I hope you all have a spectacular week! -M

    0Reply
  • Monica Burt
    OP
    Homeowner · Germantown, TN · Member since 2012 · 7 posts · 0 votes
    14y

    Oh and thanks Michael! I am very serious about my involvement in the RE industry. It is truly my passion in life I have done all of the "right/typical" things to ensure that my family's financial future is secure. Now I am ready to finally spend my time and learned skill set to help me succeed in something I am truly passionate about. I love this website! The people here have proven to he top notch and the amount of information is se one to none. Cheers! - M

    0Reply
  • Brian BurkePro Member
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    14y

    Good luck Monica! Let us know how the attorney/accountant meeting goes, and try not to think about their combined billable rate while you are in the meeting! :)

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    14y

    We wish you luck. Don't hesitate to ask us a question. There are both accountants and attorneys here that may be able to suggest things.
    -Steven

    [email protected]224-381-2660
    0Reply
  • Adam F
    Mount Vernon, WA · Member since 2012 · 52 posts · 22 votes
    13y

    Llc then elect s corp taxation status when your income level for that business rises and you have payroll. The biggest benefit of an s-corp is being able to specify a reasonable salary for yourself and pass the rest of the profits through as dividend income. It can be a huge difference come tax time.

    0Reply
  • John Briggs
    Accountant · Draper, UT · Member since 2012 · 24 posts · 5 votes
    13y

    It looks like i'm a little late to this thread. A lot of the advice has been great. So I just wanted to throw in my two cents on some of the things discussed. If you are flipping houses and plan to do more than 2 per year, an s corporation is my preferred entity because the IRS will view your properties as inventory and the income you make on it as ordinary income. For the properties you plan to hold and rent, the LLC whether multi-member or disregarded is my preferable choice. I also agree that if you are just starting out, i wouldn't worry to much about the entity selection until you have actual profits from either renting or flipping.

    Steven Hamilton II, you mentioned you use a C corp when profits are high. Can you explain why that is your preferred method?

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    John Briggs,

    I don't know your tax bracket but lets pretend you are single and your highest taxable dollar is: 85,650 which is taxed at 25%. Your income that is passed through is 50k and is going to be subject to 28% in tax(whether it is actually distributed or not). If that had been a C-corp, you would pay 15% which is $7,500 and keep those funds in the corporation to keep providing a profit.
    In this scenario:
    50k at 15% is $7,500 (C-corp)
    50k at 28% is $14,000(S-corp)

    Now if you distributed the profits from the C-corp to the shareholders in 2012 it will be subject to a maximum of 15% that would mean 15k in taxes for the C-corp shareholders in total but that doesn't matter. The point is not to be taking the money from the business, but to let it grow and reinvest over time is it not?

    A strategy that can be used is to loan money to the corporation and pay tax on the interest received. But that is taxed at ordinary rates.

    A C-corp pays tax at:
    50k 15%
    The next 9,925,000: 34% Which is still lower than the top federal rate of 35%.

    If flipping is your only income, I would operate as a C-corp, pay yourself a salary up to the lowest possible bracket, no reason you can't pay it December 31st, and your insurance and any other benefits I can from the C-corp and then keep the right amount of profit between them to keep my effective rate lowest.

    Retirement plans. They can sometimes be simpler to fund from a C-corp. Lets look at a Defined benefit plan which allows contributions of 100% of 3 years average salary up to 200k.

    You could also use the C-corp to keep your income below the thresholds of phaseouts of certain credits and deductions.

    Certain fringe benefits are another reason and beyond the scope of this thread.

    All of this takes advanced planning and constant communication with your accountant.

    -Steven

    [email protected]224-381-2660
    4Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Adam F,

    The IRS will check statistics of reasonable compensation for that field. So it is not just dependent. You are best off having a set way that you are paying yourself such as X percentage of each transaction as a commission or an actualy hourly wage. I have many clients who do not pay their salary until january after they have seen the prior year. So their salary runs a year late. Others prefer to pay it in December. While others pay a weekly, biweekly, monthly or quarterly salary.

    Also, what is passed through is NOT dividends that confuses many people when you say that, it is passed through as a distribution subject to ordinary rates. S-corps have distributions and C-corps have dividends. Just figured I'd let you know so no one gets confused. Many think it will will get special capital gain treatment.

    -Steven

    [email protected]224-381-2660
    0Reply
  • Adam F
    Mount Vernon, WA · Member since 2012 · 52 posts · 22 votes
    13y

    Steven,
    If they are offsetting their income by a year, aren't they losing their ability to move pre-tax income into certain retirement plans though? What is the advantage of that? I could have sworn my 401k said last day to contribute for that year was dec 31...
    Adam

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Adam F,

    Not if it is an annual thing. Each year they do this and when they pay their salary they max it out as well. It only affects the first year. Also in that year they can pay the minimum that they needed to in order to contribute or max it out.

    -Steven

    [email protected]224-381-2660
    1Reply
  • Account Closed
    Los Angeles, CA · Member since 2012 · 13 posts · 0 votes
    13y

    Steven, what about this "double taxation" thing we all keep hearing about when it comes to C Corps?

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    DANIEL T.,

    In regards to double taxation that can depend upon your tax rate. For example through 2012 your tax rate on capital gains (dividends and capital transactions) is 15%. If your C-corp makes 50k in profit it will pay 15% on that income and you will pay 15% on your dividends. That totals 30% if you are in the 33% bracket, you are already saving money. You also could be paying yourself a salary from there as well decreasing the highest rate paid on that income.

    Sometimes double taxation is not a bad thing. Another example is if you are not pulling money out it offers lower rates if your income is higher. Your first 50k is taxed at 15% and your next 25k is taxed at 25% after that it goes up quickly; however, it is very efficient.

    -Steven

    [email protected]224-381-2660
    1Reply
  • Travis Long
    Canyon Lake, CA · Member since 2012 · 8 posts · 1 vote
    13y

    You could also set up your C-corp to not pay dividends, which would eliminate the double taxation. Instead of paying dividends you can compensate yourself with other pre-tax benefits... Salary, medical, education, auto, etc.

    I have been reading the book "Inc. & Grow Rich" which has some pretty good info. I am still learning as well though.

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Travis Long,

    That does not help if you already have a large salary from your day job and want to take money out of the business. You could structure it as a loan to the business; however, then you run into trying to remove funds after the loan is paid back.

    -Steven

    [email protected]224-381-2660
    0Reply
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