Is an LLC or a S-Corp the right entity for a rehabbing business?

6 Replies

I'm currently a landlord and utilize an LLC for that side of my investing, however I'm preparing to start a rehabbing business and I'm unsure whether an LLC or an S-corp will be more beneficial.Any advice is much appreciated.

Thank you.

Adam

An S corporation is not a type of business entity. The S corp. designation refers to the way a business has chosen to be taxed under the Internal Revenue Code. 

Here's a good explanation: https://www.legalzoom.com/articles/s-corp-vs-llc

As far as choosing tax designation, Here's an old and good discussion on Bigger Pockets: https://www.biggerpockets.com/forums/51/topics/761... Some rules have changed since, but here are three takeaways. 

1. It depends on your goals, and you should talk to a tax lawyer/accountant with those goals in mind. 

3. Most buy-and-hold investors (and most commenters I've seen on BP) prefer LLC's.

4. Randall Maxton offered this: "If you do Options, sandwich Lease Options, quick-turn flips, assignments [stuff other than buy-and-hold], an S corp is superior to an LLC."

Given the small amount of information provided, I would say that an S Corp will be the better option for you. If you choose single-member LLC or partnership, you'll pay income tax, Social Security, and Medicare on all the profits of the company. With an S Corp you will be required to be on payroll, but can take distributions from the company that are only subject to income tax.

There may be additional relevant information that I don't know, but on first glance that would be my recommendation. We are also in the midst of a major tax overhaul and the IRS has yet to determine how it will handle certain technical aspects of the new law.

Hope it's a great 2018 for you!

Jefferson Smith, 

Thank you for your input. I will certainly consult an accountant and tax attorney before making any decisions. The legal zoom explanation was also very helpful.

Thank you for that advice Bob! It seems an S Corp may be the better route for a rehabbing business, however I will need to discuss this with an accountant first.

@Adam Jaspon

Bob is correct in the sense that there are potential self-employment tax(payroll) savings with an S-corp.

The savings comes from an example below
All of the LLC's net income would be subject to self-employment tax
Only the portion of the S-corp that is designated as salary would be subject to self-employment tax. The difference between net income  and salary is safe from self-employment tax.

One other item to be wary about is
MA LLC's do not have a minimum tax
MA S Corps have a tax on net worth, along with a $456 minimum tax.

Is the potential payroll tax savings going to be more than the minimum tax, fees paid to your accountant for income tax return filings, fees paid to your accountant for payroll tax filings etc.

These are just some things to keep in mind.

@Bisit Siddiqi

Thank you for your response. I will certainly address these points when I meet with my accountant.

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