Disregarded Entity for LLC?

19 Replies

@Paul Allen ,

Wrong again. Partnerships and S-corps are NOT disregarded entities. 

@Susan Bearce ,

That will depend upon what you want to do with the LLC. Are you planning on holding rentals? If so you do NOT want it taxed as a corporation.
here is some information.
Are there any significant differences between a LLC taxed as a proprietor vs a LLC taxed as a S-corp? Both are flow through but I have heard a lot of conflicting information about which is better for real estate.

First we need to know what you plan to do as an investor. Are you going to continue to have rental property only or engage in flipping activities? If you plan to only engage as a landlord I recommend keeping the LLC taxed as a disregarded entity. This means that you will not have to file an extra tax return. You also could find that you lose some benefits by this scenario. Simple put: Disregarded LLC is best; however, if you are operating with a partner either a C-Corp or partnership are usually best.

This is only pertaining to rental income. Other income can be a significant factor.

An LLC taxed as _______. 


Disregarded entity: Reports on Form Schedule E attached to the personal 1040 pays no self employment tax. Default if there is only one LLC Member. This would typically be reported on Schedule C or Schedule E; however, certain alternative income streams could be reported in other places on your tax return.

Partnership: Reports on Form 1065 which issues a K-1 to each partner who must report on their personal 1040. The general partner may be subject to Self-Employment Tax on their earnings. Increased costs in accounting and reporting. Default if there is more than one LLC Member.

S-corporation: Reports on Form 1120S which issues a K-1 to each shareholder to report on their personal 1040. A "reasonable salary" must be paid. Social Security and medicare will be incurred upon any salary issued. Increased costs in accounting and reporting.

C-Corporation: Reports on Form 1120. No reporting is done on the personal 1040. Good for high income individuals in the 28% tax bracket and higher. Increased accounting costs and reporting costs. No salary must be paid. Taxed at 15% on first $50,000 of income. Good for long-term investing in which funds will be reinvested.

2. Taxation rates? So let us assume that we maximized our deductions and still end up with an annual taxable net rental income of $1000. Do we pay a self employment tax on this? No right? We pay federal and state at the personal bracket level?

And LLC taxed as a _______.

Disregarded entity(Single-Member LLC) you will only pay ordinary income tax rates on your rental income. No self employment tax will be paid on rental income.

Partnership: You will pay at the Ordinary Income tax rates on income passed to your 1040. The general partner may be subject to Self-Employment Tax.

LLC taxed as an S-Corp you will pay ordinary tax; however, once you have an established income the IRS likes to see that individuals are paying the operators a "reasonable salary" for the work being done. That means there will be Self-employment Tax.

C-Corp: you will not have to worry about paying Self-Employment Tax except for any salary that the corporation decides to pay. There are no salary requirements and if you plan to keep the income in the corporation for a very long time you will not be subject to any double taxation.

This is all good information. Since this is only my husband and me and we are talking about flips and a possible income property we aren't sure if partnership or disregarded. We are really trying to get everything legally off the ground before we begin any projects. I hate to admit it but I didn't do my homework and filed for the LLC only and now we are playing catch up to get the business off the ground and rolling with all the other necessary documents needed to operate.

@Steven Hamilton II - are there any good flow charts that show entity and clearly show different tax advantages/disadvantages? I've read this info all countless times and it's always a struggle to grasp.

I personally have my rentals with a partnership LLC - I think the LLC return and K1 is a win for the reason of it keeps all the rental stuff together, and makes for cleaner personal tax filings with a "summary" in the K1.

Originally posted by @John K. :

Steven Hamilton II - are there any good flow charts that show entity and clearly show different tax advantages/disadvantages? I've read this info all countless times and it's always a struggle to grasp.

I personally have my rentals with a partnership LLC - I think the LLC return and K1 is a win for the reason of it keeps all the rental stuff together, and makes for cleaner personal tax filings with a "summary" in the K1.

 I have thought many MANY times about putting together a flow chart or other simple, easy to understand guide for this, but the more you try to outline it and flowchart it, the more convoluted it becomes.  Next thing you know, you're just rewriting the tax code.

Maybe it needs to be more of a Choose Your Own Adventure than a Flowchart.  

The problem is that there is no cookie cutter approach.  No one-size-fits-all or even one-size-fits-most solution for you to just track along with.  Each situation is unique and while one option may fit 75% of the people in that situation, it's hard to tell who those 25% outliers are going to be.

My best recommendation is to get with a real estate knowledgeable CPA, go through a long session where you outline your business goals, retirements goals, other sources of income, etc and have them tailor a plan that works for all (or most) of your goals.

Originally posted by @John K. :

Steven Hamilton II - are there any good flow charts that show entity and clearly show different tax advantages/disadvantages? I've read this info all countless times and it's always a struggle to grasp.

I personally have my rentals with a partnership LLC - I think the LLC return and K1 is a win for the reason of it keeps all the rental stuff together, and makes for cleaner personal tax filings with a "summary" in the K1.

 I will agree with @Linda Weygant ,

There are a lot of "IFS" in the situation. There is no one fits all.

I will try to keep it simple.  State laws cause liability protection for individuals who invest in LLCs, Corporations, etc.  First you must handle those legal entities correctly or you can lose the protection, next if you self manage you are subject to a fairly large potential liability for the actions you take personally.  Legal entities can help with liability, but there are many things you can do to lose the protection they grant.

Originally posted by @Linda Weygant :
Originally posted by @John K.:

Steven Hamilton II - are there any good flow charts that show entity and clearly show different tax advantages/disadvantages? I've read this info all countless times and it's always a struggle to grasp.

I personally have my rentals with a partnership LLC - I think the LLC return and K1 is a win for the reason of it keeps all the rental stuff together, and makes for cleaner personal tax filings with a "summary" in the K1.

 I have thought many MANY times about putting together a flow chart or other simple, easy to understand guide for this, but the more you try to outline it and flowchart it, the more convoluted it becomes.  Next thing you know, you're just rewriting the tax code.

Maybe it needs to be more of a Choose Your Own Adventure than a Flowchart.  

The problem is that there is no cookie cutter approach.  No one-size-fits-all or even one-size-fits-most solution for you to just track along with.  Each situation is unique and while one option may fit 75% of the people in that situation, it's hard to tell who those 25% outliers are going to be.

My best recommendation is to get with a real estate knowledgeable CPA, go through a long session where you outline your business goals, retirements goals, other sources of income, etc and have them tailor a plan that works for all (or most) of your goals.

Hi Linda -you indicate that a CPA can help set up a RE focused LLC. My husband and I need to do this soon, but I was assuming we would use a lawyer to set it up. Can it be either a CPA or lawyer or do you need both?

@Ann Howell - A CPA can file the forms with the Secretary of State and the IRS, but they cannot help you write an Operating Agreement.  If it's just you and your husband, you may be able to write your own Operating Agreement and have a CPA do the other paperwork.  Completely up to you.

If you're going into business with anybody other than your spouse, I highly recommend having a lawyer write your Operating Agreement and they can just file all the other paperwork for you too.

Hi Linda and Jerry,

Thanks so much for all the information. This definitely is just my husband and me and I am in MA so I think I need to find an attorney to help with this.

I have a question that I feel may be informative to this topic.  I certainly do not want to hijack this post so let me know if it needs to be moved.

I currently have a LLC used for contracting. I am planning on creating a separate LLC for my real estate investing (Flipping at first to build capital, then buy and hold).

My question is this, should I invest using the original LLC, create a separate LLC, or create a subsidiary of the original LLC?

I would highly recommend doing some research on the benefits of different corporations. Garrett Sutton has some great books " Start your own corporation " "Run your own Corporation " and "Loopholes of Real Estate" They are part of the rich dad series of books. They also contain some flow charts for different scenarios that help to guide you on making the right decisions. Hope this helps.