S-Corp vs C-Corp

Tax, SDIRAs & Cost Segregation
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S-Corp vs C-Corp

Nghi Le
Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes

I've been talking to several investors, attorneys, and CPAs over the past 6 months about this, including Mark Kohler and Anderson Advisors (Clint Coons' company).  I have yet to choose who I want to go with as my attorney/CPA, and it really just depends on which strategy I ultimately like better.  But I just can't make a decision, so I thought I'd approach the masses.

I'm ultimately going with Mark Kohler or Anderson Advisors because they do both taxes and legal in one place.  Mark Kohler is a strong proponent of using the S-Corp as the primary entity for the real estate business, whereas Anderson Advisors says that a C-Corp would fit me better.

My situation:

  • LLC was established last summer, but I haven't done any monetary business in its name yet (just created bank account)
  • LLC has two managers with 50/50 ownership (my fiancée and I)
  • I work full-time, fiancée works part-time and goes to grad school full-time
  • I'm currently finishing up my first rehab (held in my personal name); it should sell by April for a $30k profit
  • I have another property under contract (in the LLC's name) and will be closing on it next week. This project should close by September, aiming for a $100k-$150k profit
  • My fiancée and I will get married in August (not sure how this changes the structure of the LLC or corporation)
  • I want to deduct all of my real estate expenses (education, events, business meetings, mileage, memberships, etc.) totaling between $30k - $50k
  • I'd like to be able to deduct tuition expenses for myself (finished grad school June 2014) and my fiancée if possible
  • This year, I plan on using the profits to pay for the wedding, both school loans, credit cards, and a down payment on a house.  But in following years, I plan on just using the profits to reinvest.

I would love to hear any advice on which entity to choose (from both a tax and legal standpoint), when I should incorporate (I'm guessing before I close on my first rehab?), and if I should transform my LLC into the new corp or just create a new one.

Thank you in advance :-)

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    Brandon Hall
    CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
    10y

    I wish I would have seen this thread a year ago when it was live.

    As @Stewart Miller said, C-Corps are excellent entities to utilize. The problem is that most CPAs and attorneys, even when they specialize in real estate, think too linear and don't understand how to incorporate a C-Corp into the planning.

    For instance, @Nghi Le, I'm glad you picked an entity structure but it sounds too simple. It also sounds like you're receiving bad advice on partnership structuring.

    I would have likely recommended you be set up the following way: 

    Have the operating company be an S-Corp in which you 100% own. I wouldn't have had your wife be a 50% owner as that can increase your overall tax liability and add to the headaches later on.

    For each flip, I would have recommended that you create subsidiary LLCs. Your S-Corp would own a stake in the LLCs (along with your other partners) rather than you personally. All profits the LLC generates will then flow up through your S-Corp and onto your personal returns. The benefit here is that you maintain the amazing flexibility an LLC offers while also maintaining the tax benefits of the S-Corp.

    There are very few times it ever makes sense to bring partners into your S-Corp. If your partners had competent advisors, I'd be willing to bet those advisors would want them to set up their own operating company that then invests in projects via subsidiary entities.

    Don't bring partners into an S-Corp! You'll lose flexibility and mess up your partners' tax positions.

    Where do C-Corps come into play?

    As stated, C-Corps must have a net profit of less than $50,000 to maintain the 15% tax rate. You can utilize C-Corps in your overall structure by having your wife establish a C-Corp in which she owns 100%. She then provides services to your 100% owned S-Corp (see now why you shouldn't partner with your wife on any entities??). She is paid a perfect amount (as Paul stated above, carving out) that keeps those profits in the 15% bracket.

    Additionally, you form your own C-Corp that is an "investment management" Corp. It can then provide services to your wife's C-Corp, your S-Corp, or any of the subsidiary LLCs. Your wife's C-Corp should also be providing services to your C-Corp (Corp tax law is tricky and technical. Structure it right or the relationship will cause all C-Corps to be taxed in the aggregate, meaning you lose your 15% tax bracket).

    Few CPAs and even attorneys like to go down this route, simply because they don't understand how the tax law applies. But man, talk about saving tens of thousands of dollars in taxes.

    S-Corps are great. C-Corps are great. And LLCs are great. You should eventually be using all of these entities in your legal and tax planning.

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    • Brandon Hall
      CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
      10y

      @Link McGinnis If you have a W2 job and are partnering with someone that does not have a W2 job, each of you setting up your own entity and then having those entities invest in a subsidiary partnership makes even more sense.

      For instance, you can most likely get by with a simple LLC, however your partner likely needs the income to pass through an S or C corp. Being a W2 employee, you will likely not realize the benefits (fully) of an S or C Corp. This is because FICA taxes phase out at $118.5k of earnings granting you a sort of "natural" tax haven since your W2 earnings are factored in as well.

      I really can't advise on personal situations though unless I see all the facts.

      2Reply
    • Mike ReynoldsPro Member
      construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
      10y

      Don't you have to use a C corp with a ROBS IRA? I am researching this now as I am planning on rolling over some IRA's and 401k's into a Robs IRA so I can work on the property myself. Or is there another entity I can do this is without taking the tax hit?

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    • Brian EastmanPro Member
      Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
      10y

      @Mike Reynolds

      For several reasons, the ROBS program can  only b e built with a C-Corp.  This structure allows for the retirement plan to purchase shares in the parent company via an employee stock option purchase.

      If you are evaluating such a program so that you can do work on your own rental properties, it is not the right solution.  If you are considering creating a legitimate real estate development and/or construction company, then this type of program can be a good option to look into.

      0Reply
    • Mark Nolan
      Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
      10y

      @Link McGinnis

      The ROBS 401k arrangement will work for flipping real estate provided it falls under the real estate operating company requirement.

      To give you an idea of the requirements, at least half of the Corporation’s assets would need to be invested in real estate that is directly managed or developed by the Corporation.

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    • Mike ReynoldsPro Member
      construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
      10y
      @Brian Eastman

      @Brian Eastman

      @Brian Eastman

      @Brian Eastman  I'm not sure I am following you on that. In my case, I really need to be involved in that process at least for a few years. The reason being is that as a lifetime in the trades I can do it essentially faster and much more cost effective that another sub. I know I will slow down with age and then maybe need to exit out then but for now I am just using this to grow my IRAs for down the road so it wont be a full time thing. I am sure I can save half the construction cost and use that for more properties.

      0Reply
    • Mike ReynoldsPro Member
      construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
      10y

      @Brandon Hall Do you by chance work with investors in Texas?

      0Reply
    • Brandon Hall
      CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
      10y

      @Mike Reynolds I do indeed.

      1Reply
    • Brian EastmanPro Member
      Self Directed IRA & 401k Advisor · Wenatchee, WA · Member since 2014 · 2k+ posts · 2k+ votes
      10y

      @Mike Reynolds

      I understand your thinking, but it is not in alignment with the tax code.

      If you wish to put tax-sheltered IRA money into real estate, everything needs to be done entirely at arm's length. All expenses are paid by the IRA, all income flows to the IRA, and you cannot inject value into the IRA by giving the IRA free labor.

      With the ROBS program, you can use existing retirement funds to capitalize a business, but the business will be a taxable C-Corp.  This structure makes sense if the business is really a business offering a product or service and creating significant income.  This program is commonly used by folks opening a restaurant franchise or operating as a full=fledged real estate construction company.  It does not make sense to take what is passive, tax-friendly income such as rentals and turn that into a C-Corporation.

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    • Mike ReynoldsPro Member
      construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
      10y

      @Brian Eastman Ok, I think I understand. It would not do me much good to form it that way.  Thanks for the reply. More research is needed I guess but it looks like I wont be able to do it the way I want to.

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