structure business for inside &outside liability &for tax benefit

Tax, SDIRAs & Cost Segregation
8yFollow

structure business for inside &outside liability &for tax benefit

Kalen Mills
Flipper/Rehabber · Ingram, TX · Member since 2018 · 37 posts · 7 votes

I went to a REI seminar recently and heard some new info on how to set up LLC, S-CORP & TRUSTS. The guru was saying to have your llc under an s-Corp for multiple reasons.

1. It provides layers of liability protection.

2. It allows you to pay less taxes as a W-2 employee for your company.

He also said both of these entities can be in a trust????

It seemed to make some sense to me as he explained it, but I am now wanting to set up an llc, and if he was right I will have a small window of opportunity to put llc under s-Corp.

How do I structure my business to have inside and outside liability protection and also pay as little taxes as I can legally get away with?

1Reply
33 views

Most Popular Reply

Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
8y

@Kalen Mills , I am glad that you are networking via the REI meetings. I personally have seen more people trying to sell at these meetings. I generally meet with other investors and leave before the presentations.

Anyway, your concern is valid.  As a flipper, you have more business risk compared to normal rentals. 

Let me tell you what you might need and not need. 

You dont need: Trust. If you ever need it, you can always get it. It's not that you dont get it now when you get started and you can use it. There has to be a detailed discussion with your attorney/CPA before getting these trust and to find out if you really need them. ( Trust is not the best or the only one vehicle for liability protection, especially when you are starting out.) 

You need: S-corp. What you mentioned LLC within S-corp and LLC taxed as S-corp are two different things. Both of them are valid structure. What you might need is just an LLC taxed as S-corp. As Flipping generated ordinary income, you will be subject to self-employment taxes. If you run your flips via just LLC, you will pay that SE tax, if you run via LLC taxed as S-corp, you will avoid that.

@Wayne Brooks mentioned, Since S-corp has to pay salary, usually it is beneficial to get S-corp after you make around 50k. (because you end up paying salary the entire amount you make and pay with salary comes payroll tax which is almost equal to SE tax you would save. So at the end you dont save any taxes) However, there are instances where IRS will be ok with paying a very minimal salary when you start out and catch up with higher salary later when you expand. So, in general you can get S-corp and avoid SE tax as soon as you start. 

And there is no small window as you mentioned. If you wanted to put LLC under S-corp, you can always do that. There is no time restriction.

For S-corp election, in a simplified explanation, If you want to ELECT LLC as s-corp, you have to do within 2.5 months in the year you want to be taxed as S-crop when you create LLC (But IRS gives you some exception and you can elect past 2.5 months too. OR You also have an option to elect LLC to be taxed as S-corp every year.

[email protected]941-914-7779
INVESTOR FRIENDLY CPA®5241 Reviews
WebsiteView Page
TaxMD® | AI-Powered Tax Planning
WebsiteView Page
5Reply
See this reply in the discussion

8 Replies

Jump to latestLatest
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @Kalen Mills

    What are you protecting? What are the risks? What happens if your tenant hurts himself in your property. What happens to your assets if you are driving drunk and hit a school bus full of kids and kill some, name some, etc. ?

    what legal entities do you need in place? What insurance? Etc all things cost money, time, tax returns, renewals , etc. what is the best way to protect yourself? Don’t drink and drive,and don’t text and drive. 

    [email protected]215-283-2868
    1Reply
  • Kalen Mills
    OP
    Flipper/Rehabber · Ingram, TX · Member since 2018 · 37 posts · 7 votes
    8y
    @Carl Fischer Right now I don’t have many assets to protect. I don’t drink/text and drive. I’m willing to pay for great insurance, But I don’t know how to structure things. I also don’t want to pay an attorney $1200 to consult me on a business set up. I’m apprehensive about doing it my self the first time too. How have others structured their businesses. Or what mistakes have others made.
    1Reply
  • Carl FischerPro Member
    Rental Property Investor · Ambler, PA · Member since 2015 · 2k+ posts · 1k+ votes
    8y

    @kalen 

    @Kalen Mills

    $1200 is cheap if you get in trouble. You can easily wait until you have something to lose.  Focus on getting assets/real estate and worry about protection after you have something to lose- pay your insurance to begin with and it will become obvious when you need to add other layers of protection. you will be able to spread the cost over several assets. 

    [email protected]215-283-2868
    3Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    The guru has something to sell.....he’ll try to make it sound like Everybody needs it.  While there is some Potential merit to having an llc taxed as an S-Corp (not In one) it only applies to active income like flipping and you’d need to net probably $50k/year net from it to take advantage of it.

    Good insurance is best first line defense.

    3Reply
  • Account Closed
    Tax CPA · Charlotte, NC · Member since 2014 · 215 posts · 186 votes
    8y

    @Wayne Brooks I would agree and even suggest the net to make an S-Corp worthwhile to be even higher than 50k. You still need to pay a reasonable wage anyways.  

    @Kalen Mills I would strongly recommend keeping it simple:

    1. Form LLC (your Secretary of State Website)

    2. Obtain EIN once your notified LLC is formed (IRS Website)

    3. Open Bank Account

    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y

    @Kalen Mills , I am glad that you are networking via the REI meetings. I personally have seen more people trying to sell at these meetings. I generally meet with other investors and leave before the presentations.

    Anyway, your concern is valid.  As a flipper, you have more business risk compared to normal rentals. 

    Let me tell you what you might need and not need. 

    You dont need: Trust. If you ever need it, you can always get it. It's not that you dont get it now when you get started and you can use it. There has to be a detailed discussion with your attorney/CPA before getting these trust and to find out if you really need them. ( Trust is not the best or the only one vehicle for liability protection, especially when you are starting out.) 

    You need: S-corp. What you mentioned LLC within S-corp and LLC taxed as S-corp are two different things. Both of them are valid structure. What you might need is just an LLC taxed as S-corp. As Flipping generated ordinary income, you will be subject to self-employment taxes. If you run your flips via just LLC, you will pay that SE tax, if you run via LLC taxed as S-corp, you will avoid that.

    @Wayne Brooks mentioned, Since S-corp has to pay salary, usually it is beneficial to get S-corp after you make around 50k. (because you end up paying salary the entire amount you make and pay with salary comes payroll tax which is almost equal to SE tax you would save. So at the end you dont save any taxes) However, there are instances where IRS will be ok with paying a very minimal salary when you start out and catch up with higher salary later when you expand. So, in general you can get S-corp and avoid SE tax as soon as you start. 

    And there is no small window as you mentioned. If you wanted to put LLC under S-corp, you can always do that. There is no time restriction.

    For S-corp election, in a simplified explanation, If you want to ELECT LLC as s-corp, you have to do within 2.5 months in the year you want to be taxed as S-crop when you create LLC (But IRS gives you some exception and you can elect past 2.5 months too. OR You also have an option to elect LLC to be taxed as S-corp every year.

    [email protected]941-914-7779
    INVESTOR FRIENDLY CPA®5241 Reviews
    WebsiteView Page
    TaxMD® | AI-Powered Tax Planning
    WebsiteView Page
    5Reply
  • Kalen Mills
    OP
    Flipper/Rehabber · Ingram, TX · Member since 2018 · 37 posts · 7 votes
    8y

    Very helpful. So for right now I'll just get an LLC.

    1Reply
  • Brian Mcmenamin
    Rental Property Investor · San Diego, CA · Member since 2018 · 176 posts · 83 votes
    8y

    @Kalen Mills I own 3 rental properties that I hold title in under my LLC, so I can have some extra liability protection, but does not really help me for tax purposes since I am the sole proprietor of the LLC. I think @Ashish Acharya explained it very well, and the process to establish it.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free