LLC or S-Corp for Short Term Flips?

Question

Hi Everyone,

My family and I just flipped our first property and are ready to keep going but we want to make sure we're doing it right.  Basically there are 3 members using cash to buy properties and flip them.  What would be the best route, forming an LLC or an S-Corp? I did some research on Series LLCs but we're only doing one property at a time so that doesn't seem necessary, correct? Maybe down the line we'll do a few at a time but we're really doing this on a small scale for now.  We're looking at doing 4-6 properties a year so we're mostly concerned with making sure we're doing this right for tax purposes.

Thanks!

Michael Plaks · Answer

@Patty C.

Two issues here are intertwined: legal protection and taxes. For legal protection - discuss with an attorney, and he is most likely to recommend an LLC.

Then, that LLC has to choose how to be treated for taxes. If it does nothing - it becomes a partnership for tax purposes. But it can also elect to be an S-corp. Once again: you do not create an S-corp (most of the time). Instead, you create an LLC and have that LLC elect to be treated as an S-corp.

Last question is - do you benefit from S-corp election? The answer, of course, is - it depends. Mostly depends on how much money the company is making. Let's say that you made $60k, after all expenses are deducted. This is $20k per person, and not enough room to save on taxes. S-corp election will not help.

Now, say you made $300k combined, or $100k per person. You can reduce taxes via your S-corp by setting up a formal W2 payroll for the 3 of you. It has to be real payroll: paychecks, taxes withheld, periodic deposits with the IRS, participation in your state unemployment fund, etc. In other words, a hassle. At the $100k per person level, this hassle will be worth it.

Keep in mind that this is a generic description, and your mileage will vary. Only a one-on-one discussion with a tax professional specializing in tax strategies for real estate can give you a proper custom advice.

Elizabeth Wilson · Answer

@Patty C. - We are an LLC but file taxes as an S-Corp.  I wish I could tell your what is best for you but I  think anything involving the set-up of your company and/or taxes should be discussed with a CPA.   Especially because there are multiple people involved, you want to make sure that it is set up in a way that everyone's assets are protected and you give as little as possible to the IRS.

Best of luck and congrats on the first flip!