How does an LLC form an S-Corp subsidiary Partnership?

Question

I've read that its better to form an LLC and then 2 S-Corps underneath it that own the LLC for a partnership rather than forming a normal partnership for operations. Is this better for taxes?

Could partners just elect to have the LLC taxed as an s-corp and then share 50/50 on the s-corp or should they form 2 seperate S-Corporations under the LLC?

And what paperwork is needed so that the S-Corps can own the LLC?

David M. · Answer

@Patrick J.

First, a S Corp is a tax status and not a legal entity.  LLC’s and C Corp can elect to be taxed as a S Corp

Usually, it’s I’ll advised to have a S Corp with long term rentals. One of the main issues is the requirement for the S Corp to pay its owners a “reasonable salary.”  This converts your passive rental income into active, ordinary income subject to really all taxes including self employment taxes.

I think what you are talking about is trying to split up your holdings and your rental operations.  You would have an entity hold Title to the property.  Then, another “operations” entity would be the ‘mgt company’ and lease out the properties. The “operations” entity is now the landlord so if the tenant sued the landlord, the landlord doesn’t own the property so the property isn’t at risk.

I think you are also asking about having a holding entity.  This can be useful for managing assets and/or achieving greater anonymity.  You would create the holding entity first in an anonymity favorable State like WY.  Then, this LLC would own everything else.  Since single member LLC are pass through entities and WY has no income tax, everything flows right into your 1040 — Easy.  Remember, entities such as LLC really only provide asset protection (if used and maintained properly); they don’t provide tax benefits.

Another aspect I think you are asking is having a flexible partnership arrangements.  Each of you create a single member entity/LLC.  When you want to do a deal, your respective LLC’s form another entity which takes Title to the property.  This ‘partnership’ would need its own agreement spelling out, amongst other things, how the profits/losses will be split.  If you two directly formed a LLC with yourselves being the members, you wouldn’t easily be able to vary your splits on every deal.  Furthermore, the younger extra flexibility such as being able to sell off the LLC holding Title to the property without affecting any other deals you are doing.  Also, by having your own single member LLC, you can create/maintain a brand — if you care.

I’m not sure what you are planning, but just realize there is a fair amount of overhead for all of this.  You need to protect/maintain each LLC’s corporate veil for the asset protection.  Which means at a min getting a bank account for each, operating each as its own standalone business and not an alter ego of yourself, and having to use commercial financing.

I hope this helps. Good luck.

Ashish Acharya · Answer

Please clarify your entity structure in more detail. My head hurts reading what you wrote.

Patrick J. · Answer

@Ashish Acharya

So basically should a 2 member LLC for operations, not for rentals choose S-Corp taxation or partnership taxation to minimize taxes?

The other part of the question is if its better to form 2 S-Corporations, one for each partner to own the LLC 50/50 rather than 1 S-Corp.