LLC vs Corporation

[Luke Millet]

So I've been looking into how LLCs get taxed. I also learned how corporations get taxed recently. I was wondering if any of you rolled your LLC into a Corp to reduce the taxes you pay? I'm curious how this would fit into the real estate world or just the small business world in general. I'm looking to buy a Snap Fitness gym soon and currently my lawn business is under an LLC. It's my first year with this lawn business so I do not have much experience with the taxation yet. Thanks ahead of time for the replies :)

[Bob Norton]

@Luke Millet LLCs do not pay income taxes, because the income flows through to the members, who pay taxes on that income. Corporations pay income taxes and then the shareholders pay income taxes on any money withdrawn, as wages or dividends. However, the IRS allows a corporation (or an LLC) to be taxed as an "S-Corp", in which the net income flows through to the shareholders (or members for an LLC), so that the shareholders only pay tax on that income once. Net income from services, such as lawn care or operating a gym, are also subject to self-employment taxes, if the business is not in a corporation or S-Corp.

As @Lance Lvovsky mentions, LLCs are better for owning real estate.  This allows the owners to deduct losses in excess of their cash investment (their basis), since they get to include mortgage debt as part of their investment.  Corporations, even S-Corps and LLCs taxeds as S-Corps, cannot use mortgage debt as part of their investment, so the owners may not get to deduct all of the rental losses initially.  Rental real estate is also not subject to self-employment taxes.

For businesses that provide a service, such as lawn care or the gym, owners typically elect to be taxed as an S-Corp, so that they can limit their self-employment taxes to their salary from the business. Generally, in Louisiana, it is more tax efficient to setup an LLC for your service business and then elect to be taxed as an S-Corp. LLCs in Louisiana are exempt from franchise taxes, unless they elect to be taxed as a fully taxable corporation.

Depending upon your situation, you may want to setup a separate LLC for each rental property that you own. Series LLCs are not recognized in Louisiana, so you cannot setup that in Louisiana at this time. You can create a similar structure with one LLC as a holding company that wholly owns other LLCs that own each property.

You should discuss your tax situation with a tax professional familiar with real estate investors to determine the optimal structure for you businesses at this point in time.