LLC or an S-Corp

13 Replies

Good evening BP community!

I recently started doing business as a RE investor and I would like to hear from other investors out there your thoughts about filing taxes as an LLC vs an S-Corp. Taking in consideration that I currently hold a full-time job and I invest part time what would be the best way to save money. Your advise is valuable!

I look forward to hearing back from all of you soon!

Willie

There are a couple of differences in the two options. In my opinion, an LLC is definitely the best choice. There is just no point in incorporating. The main thing that you can do with an s-corp that you can't do with an LLC is to issue stock which is not generally necessary in RE. Another deterrent to s-corp's is the fact that you have to hold annual meetings and record minutes. Do you really want to be required to do this as a relatively small time investor?

Basically every other benefit gained by an s-corp is also available in an LLC.

Now, if you are going to start doing business in loans, title, syndication, etc. then the pro's and con's start to change. But, from what it sounds like, it looks like you are starting as a landlord, correct?

Best of luck

I hope some of you seasoned RE investors and tax experts can confirm this. Last week I spoke with an attorney from Framme law (Legal Shield) on this very topic. My question was a little different. I wanted to know if my LLC should be organized (designated) a sub-chapter S corporation. The 'S' simply refers to a particular section of the IRS code. An experienced CPA and an experienced attorney whom I know from a local lead share group were discussing this by email and I decided to run it by a second attorney to understand the advantages and disadvantages of an 'S' Corp rather than a straight LLC. Now I was grocery shopping during the phone call and had I been at my desk I would have taken about one page of notes on this second attorney's legal advice. First of all the Articles of Organization that had been prepared by the first attorney after an initial consultation with the CPA were in good order. Second, since I was a sole proprietor, and not dealing with a partner, the sub-chapter S designation means I report the income/loss from my REI activity on a Schedule C. No separate tax return necessary. For a Partnership this benefit is not available. There was no mention of S-Corporation, board meetings, minutes. If an S-corp and sub-chapter S business entities are one and the same I guess I'm learning that today for the first time. I spoke with a hard money lender a few weeks ago and learned that his company would only loan funds to an entity. If I am required to conduct a meeting and have minutes I guess I'm hearing about that requirement too for the first time. This is something I will bring up with my tax preparer, and the CPA and attorney I mentioned previously. I suspect this process can be very formal or informal. Hope this helps.

Originally posted by @Cody Steck :

Basically every other benefit gained by an s-corp is also available in an LLC.

The big thing that you're missing, based on my reading, is tax treatment. According to the Rich Dad Advisor books (as well as other talks I've heard on the topic), if you are just doing passive buy and hold, then an LLC is probably best. However, if you are doing anything "active" such as flipping or wholesaling, you want to do S-corp (alternatively you can file your LLC to have S-corp tax treatment) because you don't want to have to pay self employment tax on all the profit. You can take a reasonably salary, which is subject to self employment tax, and then disburse the remaining profits free of that tax. So you could have tax savings there.

Best to discuss each individual's situation with an accountant and/or attorney.

LLC = your. rental property

S-corp= your flipping property. 

Also you do NOT want to be the member holder of any of your entities. If something happened on your property or if someone just want to sue you, they Can find you if your the owner.

Also talk to a tax strategies Not a CPA.

CPA= can't protect assist. 

It's also going to make a difference based on your net income.  You won't see the tax benefits of incorporating if you're taxable income doesn't reach a certain level.

I have enough expenses that I write off (also depreciation, home office, cell phone, etc.) that it's not going to really give me many tax benefits by incorporating.

Meeting requirements http://smallbusiness.chron.com/scorporation-meeting-minutes-requirements-62256.html

However, those don't really apply as much if you're incorporating by yourself.  Honestly, your best bet is to find a reasonably priced CPA in your state.  Some will give you a free consultation and answer some of your questions.

Thank you guys for all your feedback. A lot of good and detailed information!

Also another great benefit to an S-Corp is the fact that you can issue stocks. 

If you have a long term projects where investors/partners come in and out changing ownership %'s and tracking every partner as a llc/partnership is a huge pain. 

If its an S corp you can just adjust through shares which makes preparing the tax return a lot easier for the CPA. Which= less cost for you. 

Reading through all of the comments brings up several questions and comments. I am going to assume you will be in business for yourself. The only reason, in my opinion, to incorporate is if you are in business with a partner(s).

As a new investor, what is the financial benefit of incorporating or setting up an LLC?

There isn't one. You can act as a sole proprietor and deduct all of your utility, technology, education expenses...etc...

You are adding more tax returns, attorneys fees, and accounting fees. With an LLC you will also be adding self-employment tax paid towards medicare and social security which will be paid on all net profit of the corporation. This is not the case with an S-Corp by the way as the shareholders can be considered employees and take a token salary.

Less liability with an LLC or an S-Corp? Stop dreaming about this and stop letting people tell you this is true. Your personal assets are "hidden" from the LLC or the S-Corp but everybody knows you can sue anybody at anytime for any reason. If somebody has a valid reason to sue an LLC started up by a new investor they are going to find out who runs it and sue them personally as well.

The bottom line is if you are starting out flipping houses how much liability do you really have? Get a $1M liability policy. If you're a buy and hold investor, get a $1M liability policy on each property you own. Do some quick projections and some math on how much you REALISTICALLY expect to earn (net) your first year in business flipping houses and then figure out how much of that you will spend setting up the LLC. Project it out five years even. If you're still on your own (no partners) it's probably still not worth it financially.

It's a waste of money. Just my two cents @William Ruiz

Thank you Rob, your comments are extremely helpful. I appreciate you taking the time to clarify my questions.

Originally posted by @Brett Russell :
Originally posted by @Cody Steck:

Basically every other benefit gained by an s-corp is also available in an LLC.

The big thing that you're missing, based on my reading, is tax treatment. According to the Rich Dad Advisor books (as well as other talks I've heard on the topic), if you are just doing passive buy and hold, then an LLC is probably best. However, if you are doing anything "active" such as flipping or wholesaling, you want to do S-corp (alternatively you can file your LLC to have S-corp tax treatment) because you don't want to have to pay self employment tax on all the profit. You can take a reasonably salary, which is subject to self employment tax, and then disburse the remaining profits free of that tax. So you could have tax savings there.

Best to discuss each individual's situation with an accountant and/or attorney.

This is what our accountant had us do. LLC and file as an S Corp.

Hi I noticed this thread was 1 year old, but I have the same question - LLC or S-Corp? I'm just starting out with Buy & Hold for rental properties. My accountant seemed to think Scorporation was the best route but I am still unsure if that's the right thing to do. I'm hoping the info in this chain still holds up 1 year later however any additional feedback would be helpful.

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