How did you incorporate? C-Corp, S-Corp, LLC??
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!
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.
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.
I've been doing a lot of research into rentals through a C-Corp and stumbled upon this site and thread. Probably one of the only places to mention leaving rental profits inside the c-corp.
Would the profits from rental income NOT be subjected to Personal Holding Company Tax if isn't distributed by dividend? This is the biggest source of confusion for me.
Appreciate any help. Thank You!
I've been doing a lot of research into rentals through a C-Corp and stumbled upon this site and thread. Probably one of the only places to mention leaving rental profits inside the c-corp.
Would the profits from rental income NOT be subjected to Personal Holding Company Tax if isn't distributed by dividend? This is the biggest source of confusion for me.
Appreciate any help. Thank You!
Wallace,
It would still be subject to income tax even if distributed, which is still not in the best interest in most cases. Besides, you NEVER want to hold rental real estate in a c or S corporation.
I've been doing a lot of research into rentals through a C-Corp and stumbled upon this site and thread. Probably one of the only places to mention leaving rental profits inside the c-corp.
Would the profits from rental income NOT be subjected to Personal Holding Company Tax if isn't distributed by dividend? This is the biggest source of confusion for me.
Appreciate any help. Thank You!
Also, in some places it can be considered malpractice to suggest holding rentals in a C-corp.
Glad to see Steven point out the C Corp issue with rentals, but hold your horses too, I have had many properties that were intended to be flipped, then the market indicates that it may be heating up and holding the property over a year turned out to be more profitable, so consider that you could buy, rehab, rent, allow appreciation to pile on, then sell it.
The increase in value in your S-Corp can be at the capital gain rates, if you hold too long in a C Corp you may get hammered. The LLC, it's irrelevant as you're on your personal tax rate.
So, my only suggestion, not being a tax guy, is to get a good idea of what is done in RE. Design your entity to be flexible and adapt to other strategies. You'll probably get to a point where multiple entities makes sense for different operations. Set the company up to the business needs as to function and maintaining the entity, then to tax implications and earnings, then to operating in concert with other entities, then to liability aspects and assess the risks associated with that type of entity. Then do it, get tons of insurance and you're ready to hit the bricks! :)
Thanks for the replies! I just happened to have a C-Corp for other business and figured I'd use that.
Guessing an LLC subsidiary under the C-Corp is no better...
Looks like I have a lot of reading to do on here! Thanks for the help!
Guessing an LLC subsidiary under the C-Corp is no better...
Looks like I have a lot of reading to do on here! Thanks for the help!
Correct, Definitely not any better as it would be taxed the same.
The increase in value in your S-Corp can be at the capital gain rates, if you hold too long in a C Corp you may get hammered. The LLC, it's irrelevant as you're on your personal tax rate.
So, my only suggestion, not being a tax guy, is to get a good idea of what is done in RE. Design your entity to be flexible and adapt to other strategies. You'll probably get to a point where multiple entities makes sense for different operations. Set the company up to the business needs as to function and maintaining the entity, then to tax implications and earnings, then to operating in concert with other entities, then to liability aspects and assess the risks associated with that type of entity. Then do it, get tons of insurance and you're ready to hit the bricks! :)
That is not an issue as it is still inventory. You just have additional income from the rent, no depreciation etc.
Personally, I'm a HUGE fan of a Family Limited Partnerships. Their flexibility is mind boggling to most.
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%
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.
-Steven
Steven,
This is great info. I would like to tell you my scenario, then get your opinion on it. I have LLCs for my rental income. I established an LLC for ordinary income, and I have my wife as my partner. She is inactive, so any income to her she receives as a distribution and pays no self employment tax on it. Because payroll is a pain, I'm putting off filing for S-corp status until we start earning $60,000 or so.
How does this compare with your strategy of having a C-Corp? I'd be interested to know. Thanks.
This is great info. I would like to tell you my scenario, then get your opinion on it. I have LLCs for my rental income. I established an LLC for ordinary income, and I have my wife as my partner. She is inactive, so any income to her she receives as a distribution and pays no self employment tax on it. Because payroll is a pain, I'm putting off filing for S-corp status until we start earning $60,000 or so.
How does this compare with your strategy of having a C-Corp? I'd be interested to know. Thanks.
That strongly depends upon the business. What is the line of work? Different corporations have different strategies. Are you pulling money out of the corporation? If you are not technically the reasonable salary requirements don't apply.
That strongly depends upon the business. What is the line of work? Different corporations have different strategies. Are you pulling money out of the corporation? If you are not technically the reasonable salary requirements don't apply.
My LLC for ordinary income is for fix and flips, lending money, wholesaling, and I charge my rental properties a management fee through it. I know this turns passive income into ordinary income, but I use that money to feed my Roth 401K. My plan was to distribute 1/2 of everything to myself, and 1/2 to my wife, who is an inactive partner. The amount I earn right now is small, less than $20K. I don't want to do payroll, and I sure as heck don't want to pay a VA to do payroll until I'm earning more. At that time I'll file for S-corp status. Hope this helps.
My LLC for ordinary income is for fix and flips, lending money, wholesaling, and I charge my rental properties a management fee through it. I know this turns passive income into ordinary income, but I use that money to feed my Roth 401K. My plan was to distribute 1/2 of everything to myself, and 1/2 to my wife, who is an inactive partner. The amount I earn right now is small, less than $20K. I don't want to do payroll, and I sure as heck don't want to pay a VA to do payroll until I'm earning more. At that time I'll file for S-corp status. Hope this helps.
Mike,
I didn't forget about you. You can basically automate payroll and even set it to be an annual payroll of a set amount. It is very flexible. That said. The other concern I have is if a pass through entity is best for you.
Bringing this thread back from the dead-Since it was a good one and I didn't think it was necessary to have multiple threads of the same general topic-please correct me if I am wrong.
Anyways, my question/s pertains to my particular situation that I am facing at the moment. Hoping you guys can chime in and point me in the right direction. I am currently on my 7th house "flip" since I started in Nov 2013. I have been told by two different accountants that at this time not necessary to incorporate (at all). However, I am trying to acquire a loan through a small local bank here in Houston, TX and they are hinting to me they feel more comfortable lending to me if I incorporate (Probably as a Sub S as CF indicated in the quoted text above). I am unsure if this will make or break the deal with the bank as they will not specify. My plans are to do 6-7 flips a year and to start residental rental properties early 2015. I don't know if I am big enough to start looking into incorporating. What do you guys think?
I am neither an accountant nor an attorney, and I am not sure if someone else mentioned this, but you need to be mindful of the IRS designating YOU personally as a dealer. Which could affect your taxation if you are doing other things in real estate. If you set up an entity, that entity can be designated as one (since you are doing multiple flips in a year) and you are personally off the hook.
I always lean to an LLC and then make a designation as to how I want it to be treated for taxation purposes. In Texas it is around $300 bucks to set up an LLC and then whatever your tax preparer charges to maintain it yearly.
The corporate formalities of the LLC just make it easier in my opinion.
It has been my experience with IRS auditors that if you do more than 2 flips per year, they consider you a dealer. Which means they look at each of your properties as inventory. Very different from holding a real estate property. When your properties are considered inventory, every dollar put into the property is "capitalized" which means you only get the tax benefit of those dollars when you sell the property. This also makes the income considered ordinary income (subject to 15.3 self employment tax) which is also different than the normal passive income status of rental actitivies.
If you talk to 10 CPAs, you'll get 15 different answers. :)
All my tax clients that do more than 2 flips per year use an S-Corp because the S corp can help you minimize self employment tax.
I always lean to an LLC and then make a designation as to how I want it to be treated for taxation purposes. In Texas it is around $300 bucks to set up an LLC and then whatever your tax preparer charges to maintain it yearly.
The corporate formalities of the LLC just make it easier in my opinion.
Being considered a deal is dependent upon EACH transaction and the characteristics of said transaction.
This has been an amazing discussion. I am trying to wrap my head around all the information. I am a newbie to REI and am also trying to figure out the best type of incorporation to begin with.
I was thinking of wholesaling first, then progressively move to flipping then to buy and hold.
Jose
Bump!
This is like my 4th time diving into this issue and my head is exploding once again. Can anyone explain the difference between being an S-corp and being an LLC filing as an S-Corp? My new accountant is recommending I do a C-corp, but I'm not sure about that either. The plan is incorporate and transfer the properties in the 1st week of 2015.
Here's the story: My wife and I have three 100 year old properties w 13 doors, one of which is ours. I actively manage, maintain and reno them, in addition to my part time consulting business reported on a form C. I qualify as a RE pro by the IRS criteria. My motivating interest in incorporating is to "de-passive" the RE business, so it shows up on the FAFSA & CSS college forms several years from now as the small business it is and excluded from liquid assets, and not a passive rental business they could force us to sell off.
It sounds like a C-Corp has benefits to me besides the one the accnt touted, being opaque to the colleges. We have tended to keep profits in the business and reinvest, so we would pay 15% for less than $50k rather than our personal rate. And it sounds like excess can be directed to retirement accounts, which is really the whole purpose of our RE empire, funding retirement. Her job, my business, and living rent free takes care of our normal expenses. We do not have much in retirement accounts at all, which ironically would be automatically excluded from consideration as assets. When all the units are renovated and producing to their fullest we could be $50-75k positive a year, and in 13 years when they're paid off we'll see another $50k. Will that cashflow be very expensive to tap at that point? Or is it easy to dissolve the C-corp into an LLC after the kids are through college in 10 years?
But what was this about appreciation being problematic in a C? My places are in a gentrifying area, and hopefully will rise dramatically, one has already done so :)
So, back to the top: since Steve says holding RE in a corp is criminal, what are our other options? Does LLC filing as S have a benefit for us? Is it the best of both worlds? Or is LLC in any form just not good enough to not be questioned by colleges.
I want this structuring to be above questioning. I know the above is a lot, but from my searching and previous questions I see I'm not the only one asking this and not finding clarity. Perhaps eventually there can be an article or FAQ. I suspect there's a lot more buy and hold types out there than wholesalers or flippers.
Bump. No one?
From my research, it seems that an LLC is the way to go for small operators who'd otherwise go with "sole proprietor," and it's the way I'm headed. I'm hung up on a couple of aspects, and I thought I'd ask here before starting a new thread.
So my question is somewhat related to @Johann Jells , since I too am concerned with money and assets used to calculate college financial aid.
I'm pretty smart but have zero business experience (as in keeping books, taxes, profits, etc). My goal for the next several years is to build a foundation for retirement, not to make any profits -- as in, no profits at all. I have 2 SFH rentals in metro Atlanta and hope to add one or two more in the next year or so. My kids are in private school, I'm a single parent with a decent but not amazing income, and we're looking at college in 2-3 years and I'm afraid of upsetting the financial aid apple cart that's making their current schools possible. How does one run a legitimate business, pay appropriate business taxes, and come out with a zero sum to report on my personal 1040 and somehow protect the properties from being considered assets to be sold for tuition? I did consult a CPA recently but conflicting information now makes me second-guess!
Thanks everyone!
I did consult a CPA recently but conflicting information now makes me second-guess!
Welcome to the Twilight Zone Anna! I've halfway concluded this is a taboo subject, the people who've figured it out don't talk about it for fear the colleges will figure it out too.
@Johann Jells -- or maybe we're the only ones more concerned with financial aid eligibility than with taxes?? :-)
I'm a CPA and I can tell you if you ask 10 of us the same question, you'll get 15 different answers.
I'm not familiar with FAFSA and how they look at income. But hopefully I can give you info that won't cause more confusion.
In most cases, holding rental property in a c corp is not a good idea because of how the IRS handles title transfers and dissolution of the entity. Anytime you transfer title out of the business name (usually for refinancing purposes), the IRS makes you pretend that you actually sold the property at market value. This means the C corp would now get to pay capital gains on that sale even though you were just refinaning.
In the case of dissolving the business, you have to do the same phantom sale, which means the capital gains you have to pay is higher than what it normally would be.
This is the same scenario for S corps. The confusion with S corps is that you always have to make an IRS election to tax it as an s corp. So you can have a corp or an llc and elect to have it taxed as an s corp.
An LLC is the common entity used to hold long term real estate. From a tax perspective whether you are operating as a sole proprietor,LLC owned by one person (commonly called single member LLC), or LLC owned by two or more people, your tax consequence is exactly the same. The LLC is there for liability protection.
If you had 100k or more of rental income in a c corp, that would be costly to tap into. You can either pay it to yourself in a wage (so you pay your personal income tax rate on it plus payroll tax) or you can distribute a dividend to yourself where you still pay tax on it. If you pay a dividend, the corporation still pays income tax on it. So corporate tax rate plus dividend tax rate = no good.
I would only hold real estate in a c corp if I knew I could keep corporate profit to darn close to zero. But if that helps you qualify for FAFSA, it may be a worthwhile strategy.