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.
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.
Thanks @John Briggs. That helps some. 2 things still confusing me, you say an S has the same dissolution problem as a C? So that only leaves an LLC without this issue, and a straight rental holding LLC looks passive, which means ASSET!! to the colleges. Our goal is to "de-passive" the business. The other thing: what differences, if any, exist between a C or S, and an LLC electing to be taxed as one of them?
As for minimal C income, we could pull that off for the 10 years till my kids are out of college by reinvesting and perhaps feeding as much as possible to a retirement plan (please comment on that). But after that both I and the mortgages approach retirement, when cashflow will increase and it will be wanted. So the C fails at that point taxwise. Or not, depending on what capital gains is at that point, no?
An s corp is either a c corp that made an s election or an LLC that made an s election.
The c corp pays taxes as an entity. The S corp and LLC both pass the tax burden to the individual. So those entities don't pay income taxes. You pay income taxes based on your individual tax rate.
If the colleges don't look at c corps that you own for purposes of the FAFSA than it sounds like that is a good plan for the next 10 years. Especially if you are showing no profits. Then you would deal with the capital gain hit in 10 years.
If I put myself in your shoes and had to make this decision, I would compare the amount of grants (free money) I would be getting from FAFSA for each of my kids over the 10 years and see what kind of tax burden of the capital gain hit in 10 years. It very may be worth it to do this strategy for you.
Paying capital gains in 10 years isn't the end of the world. It does increase your basis in the property which means more depreciation. It's just that if your strategy is to hold the properties forever, then you would have never paid the capital gains rates.
General rules of thumb are Subchapter-K (partnership) taxation or Sole Proprietor taxation for holding property. Subchapter-S or Subchapter-C for flipping / wholesaling but never owning any real property. C-corps usually don't make much sense for the small business owner, unless they fully understand the consequences of double taxation. Limited Partnerships also have their place, especially when raising private money.
It's much harder to distribute out property in kind from a Corporation than a partnership. There are also favorable basis rules to partnership taxation when a partner personally guarantees a mortgage.