Getting everything ready to form my new LLC for my REI company and not sure which is the best way to go for tax purposes. S Corp or C Corp

For now it will be owned and operated by myself but my two sons may join later.

Any advice will be greatly appreciated!

Thank you!

@Cynthia Harrison

It's a very individual specific question and there's no general answer. It heavily depends on the type of business conducted in the LLC and the net income level as well as your and your sons' facts, circumstances and goals.

@Cynthia Harrison

Purely depends on what you plan on investing in... You'll need to discuss with a tax professional and a lawyer.

Some setups will benefit you depending on if you are doing flips versus long term holds. You need to make sure you're doing the right setup so you aren't hit with tax issues.

@Eamonn McElroy Thank you Eamonn.

I am starting with wholesaling and want to expand to flipping then to rentals (long term holds). Not to concerned with sons yet as it will be awhile before they join in. At the moment I'm on disability and have a very small retirement income. I'm sick and tired of living month to month and need to change things A LOT!

Does this info help? Also I'm meeting with a lawyer this week to set LLC up but after being "let down" by two divorce lawyers I'd like to have some idea going in

Thank you!

@Christopher Phillips Yes that is exactly what I'm trying to avoid! I'm orginally from NY State and thought I knew about taxes only to discover, in reality, that Kansas put them to shame! I want to avoid paying taxes as much as possible legally.

Thank you, Cindi

@Cynthia Harrison

You shouldn't let an attorney advise you on tax matters unless they are a tax attorney.  It's advisable to consult both a business attorney and a tax CPA/EA pre-entity formation so you get both sides of the coin.

Generally you should separate wholesaling or flipping activities from rental real estate activities for both legal and tax reasons. i.e. don't put them in the same entity.

The best way to start out initially might be an LLC taxed as a disregarded entity. The administrative overhead of a corporate tax entity would outweigh any potential benefits if you're starting from nothing.

Best of luck.

@Eamonn McElroy . I just read the forum on "layering". If I plan on doing different strategies would it make more sense to have a different LLC for each and later them? I have so many questions and I want to do this right!

@Eamonn McElroy . What is a disregarded entity? Would that still protect my personal assets?

@Cynthia Harrison

"I just read the forum on "layering". If I plan on doing different strategies would it make more sense to have a different LLC for each and later them? I have so many questions and I want to do this right!"

I'm a big advocate of the US Navy "K.I.S.S principle."  It's not a pejorative against you or anyone else, it just connotes that systems work better when they're not over-complicated.

Don't worry about complex entity structuring before you've earned a single dollar or have one rental.

Focus on making money first.

@Cynthia Harrison definitely speak with a CPA before doing anything, but if it were me, I would start with just the LLC with no tax designation, for ease of use. Then, when I started generating more serious ACTIVE income (wholesaling and flipping) I would look into a c-corp to save on some taxes by taking a "salary" and saving on some "self-employment" tax.

For rentals, just a pass through LLC.

@Cynthia Harrison

Disregarded entity = files directly on the owner's return. It's effectively "dissolved" into the owner for federal income tax purposes. (i.e. you file the LLC activity directly on your 1040 as if the LLC doesn't exist)

@Jason D.

I've found C Corps can't beat S Corps from an effective tax rate perspective.  This is true even under the TCJA assuming a Specified Service Trade or Business with owner's AGI above the QBI phase out.  Ran dozen of projections this spring.  The double taxation of C Corps is still very unattractive.

C Corps make sense in very limited owner goal patterns: foreign ownership, owners that want heavy fringe benefits, etc.

@Eamonn McElroy can you take a salary from the S-Corp to avoid self employment tax on some of the profit? Or does the corporate tax on the profit offset any self employment tax savings?

@Eamonn McElroy . Ok skip the last questions. Googled it! However, if I go with disregarded entity then I'll have to pay self-employment taxes, right?

Here's my breakdown - I need to be successful in my 1st yr, my goal is to net $50k. My SSDI ($12k, which will become taxable & will stop) and my whopping retirement ($1k/yr) plus I will lose my healthcare.

Won't SE tax kill me?

@Eamonn McElroy . Thank you for your advice! I like the K.I.S.S method but tend to do the complete opposite! However, I will keep that foremost in my brain.

@Jason D. Thank you also!

@Cynthia Harrison

It's advisable to direct specific questions to a professional you've engaged who can have the deep conversation with you regarding facts, circumstances and goals.

"However, if I go with disregarded entity then I'll have to pay self-employment taxes, right?"

You're going to be paying SE taxes with an S Corp too...  With an S Corp you'll have professional fees for a separate income tax return and professional fees for employment tax returns, running payroll, and issuing W-2s.  Read: more overhead.  Do the cons outweigh the pros for you?  I don't know, but it's a good question for your tax pro.

@Jason D.

S Corporation owners must draw reasonable salary for services they provide to the S Corp.  They are subject to FICA and unemployment taxes on this salary.  Any net taxable income above and beyond this reasonable compensation avoids employment taxes, which is the appeal of an S Corp: the mitigation, but not elimination, of SE taxes.

@Eamonn McElroy . Thank you again for the info! Good advice that has been taken seriously.

@Eamonn McElroy Agreed on all points - this is a highly variable question.  I also worked through a large number of calculations this spring and not one of them the C-Corp made sense - the QBI deduction and lack of double taxation are just too strong of a benefit still, even with the lower rates.

Even the S-Corp versus Single Member LLC/Disregarded question has become much more difficult, especially for someone who is not an SSTB. Every bit you pay out in wages reduces the potential QBI deduction - we have quite the seesaw to play with now, and the best result can vary year to year. If you are in a state that taxes pass through entities directly (like NH) it adds even more of a mess to the calculation!

In summary - definitely sit down with a tax professional and talk through it, but likely when you are getting going keep it simple. A disregarded entity (single member LLC) will work great, and once you start seeing the money flow in it could be worth it to start getting fancy. As Eamonn noted the fancier you get, the more overhead you'll have

@Cynthia Harrison

There are already many helpful comments above. But I just wanted to add to what @Eamonn McElroy wrote: while an attorney can help you with the operating agreement, most attorneys are not qualified to answer many of the tax questions you may have. I would strongly, strongly suggest that you work with a CPA as well when you work on your operating agreement. 

When I practiced more, I toyed with the idea of just requiring all of my clients to hire a CPA if they wanted to work with me. I couldn't do that for many reasons but I feel that strongly about it. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Originally posted by @Cynthia Harrison :

@Eamonn McElroy Thank you Eamonn.

I am starting with wholesaling and want to expand to flipping then to rentals (long term holds). Not to concerned with sons yet as it will be awhile before they join in. At the moment I'm on disability and have a very small retirement income. I'm sick and tired of living month to month and need to change things A LOT!

Does this info help? Also I'm meeting with a lawyer this week to set LLC up but after being "let down" by two divorce lawyers I'd like to have some idea going in

Thank you!

Most of the above is correct. I will disagree on some points but it depends upon the exact situation. For some clients they have been far better off with a C-corp as we've been able to structure their tax rate to remain at 21% even plus the benefit of certain fringe benefits.

What it looks like is some flipping and wholesaling income. I would strongly advise you to consider discussing this with someone qualified. The second question is why you haven't consulted with an accountant specifically to get information that pertains entirely to your situation. There may be opportunities you're missing out on that haven't been discussed here.

Assuming you can have someone else fund the business if there are start up costs you should consider looking at a Special Needs Trust.

Feel free to reach out if you have questions here. 

@Chris K. Thank you Chris. It was next on my list!

@Steven Hamilton II . Thank you Steven! After the Kansas fee for filing LLC, getting domain name & setting up website with SEO's, business cards etc. I'm really hoping there's not many more expenses to incur right away! Hahaha

@Steven Hamilton II . Could you please mention a couple of the bigger opportunities I might be missing. Even just briefly if you would please. Rubbing these two nickles together is wearing them thin! Hahaha!

Originally posted by @Cynthia Harrison :

@Steven Hamilton II. Thank you Steven! After the Kansas fee for filing LLC, getting domain name & setting up website with SEO's, business cards etc. I'm really hoping there's not many more expenses to incur right away! Hahaha

 You may want to hold off on doing that. You need to speak with someone ASAP as there may be ways to avoid losing your SSDI.

Could I call you? When would be a good time to call?

Originally posted by @Cynthia Harrison :

Could I call you? When would be a good time to call?

 You are always welcome to reach out. I disagree with the strategies above. There are far more lucrative options to protect your disability.