Real Estate Investor · Covington, IN · Member since 2016 · 40 posts · 5 votes
I started a side business this year with my mom as a mainly silent partner. We have tools, truck, trailer, insurance etc for the equipment for the business and are currently finishing up a house flip that we purchased. Will hopefully be on the market in January. We are trying to decide how to structure our business finacially. I see LLC being used commonly for real estate but we are unsure if that will work or if we would be better with an LLP. How do we split the tax liability between us since we both have regular jobs? Do we need to move the equipment, truck, etc into the business name before the end of the year to be able to depreciate? Thank you for your responses in advance. I always find such useful information on here.
Professional · Bothell, WA · Member since 2016 · 89 posts · 17 votes
9y
@Kyle Allen, I highly recommend interviewing an account / CPA or two to discuss tax differences between the two. As for legal differences, if you use an LLC I recommend a manager managed rather than member managed (if your State makes that distinction). An LLP would minimize her liability in a more truly silent partner style, increases yours as the general partner. Some States recognize a family limited partnership which has some transfer benefits.
Some of the members on this website use retirement funds. Does not appear you are doing so given your post above, but please keep in mind that parents and kids are disqualified persons when it comes to qualified funds.
Real Estate Investor · Covington, IN · Member since 2016 · 40 posts · 5 votes
9y
@Frank Selden , What are you referencing in regards to the retirement funds? I will definitely be sitting with my cpa and lawyer this week before deciding. i was just interested in what was most common for members on here. We currently have a few existing rentals, and i started a side business in construction on top of my auditing job this year and then we decided to start investing again and are finishing up flipping this house so with all the moving parts i didn't want to shoot myself in the foot by not researching. Plus i like to have more knowledge of what is common when i meet with the CPA to ensure I hav a grasp of my options. Thank you very much for your responses!
Accountant · Cherry Hill, NJ · Member since 2016 · 173 posts · 201 votes
9y
Hi Kyle, I am a CPA who owns and invests in real estate and does r/e tax and accounting. I also used to work for the IRS and I have taught accounting and tax on a college level.
Enough about me. About your matters - a company can only depreciate whats in its name. Good idea to push all that stuff into the company name. You get the writeoff but your insurance will be a little higher, because anything in an LLC is more risk to an insurance company. However, the write offs often justify the action.
An LLC is an asset protection strategy. It is not a business entity when it comes to tax, so you must elect - partnership, S Corp or C Corp. Partnership is likely the easiest way.
Next, there are two things to decide - how much does each partner own of the company and how are you going to split the profits. These two amounts do NOT have to be the same. For example, you may own it 50/50, but pretend Mom was retired. You could allocate a larger chunk of the profits to her for lower taxation of the income. There is no flat answer I can offer you here, because as you can see, it all depends on the unique economic facts and circumstances of the partners. In my pretend case, being an LLC electing partnership treatment is the best bet, but that doesnt mean its the final answer for you and your mother.