SHOULD I CREATE AN LLC OR CORP?

47 Replies

@Derrick Gordon  

Use an LLC for rentals, S-Corp for flipping.

S-Corp gives you better tax advantages for the short term gains on flipping houses. LLC gives you asset protection on long term holds. Should use insurance (and umbrella) plus mortgage on properties for additional protection.

There is some semi correct information here. 

The big answer is it depends- it will vary by circumstance. A lot of people create S corps before needing them and guess what, then it costs you money rather than saving you money. 

An S corp is an election made TO an LLC (or a C Corp). It's a tax treatment you elect to utilize with the IRS.

So you start off with an LLC and when the amount of active income is high enough you look into making an S corp election (note: Income from flips and wholesaling is ordinary/active income for both. Subject to self employment tax. NEITHER is capital gains).

Just getting started in investment properties. Is something like Legal Zoom to set up an LLC sufficient for personal asset protection when I plan to purchase about 1 rental property/year or is it worth it to hire a lawyer to do it?

Sorry in advance for newbie question. I would like to ask a silly question if I may. I have friends that have LLCs for their properties, but they bought (loan + title) under their personal names. They told me they have the renters pay to the LLC and a while later changed the title to their LLC. Reason Im guessing is because difficult to get regular loan under new LLC, also lower rates if personal not business. Would they still be held liable prior to that title transfer? If a renter sues the LLC, I would assume they go after the owner of the LLC as well so would their personal assets really be protected?

Thank you :-)

Originally posted by @Sharon Powell :

@John Underwood is it possible to have both?  I would like to do both as my business grows.  Newbie to wholesaling and flipping.

Of course. You can even have multiple of each. I wouldn't over complicate things until you need to. You can have one pass though entity on your taxes after that expect to have to file a return for each business. The exception to that is a self directed IRA (although there can be exceptions to this too)

@John Underwood  

I'm not sure what you mean by you can have one pass through entity on your taxes? 

A pass through entitity would be a partnership or S corp...both of which file their own business returns and then create a K-1 that reports on your 1040. You can have an unlimited number of these. 

If you're a single member LLC or Sole prop you're a disregarded entitity- again you can have an unlimited number of these on your personal return / 1040 as well.

@Natalie Kolodij I'll give you an example. I have an LLC that is not a disregarded entity. This contains many long term rental properties. These go on Schedule E of my personal Tax return. It passes through to my tax return. I do not have to file a separate return for this.

A Disregarded entity is my ROTH IRA LLC. It does not pay taxes as taxes were paid when the money went into the account and I do not have to pay tax on the gains when I with drawl money after 59.5 (there are exceptions).

Since it doesn't pay tax or have to file a return (there are exceptions) then it is a Disregarded Entity for Tax purposes.

@John Underwood  

I think you're misunderstanding how the filings work. 

A disregarded entity isn't one that doesn't  just pay taxes- it's one that doesn't file a separate tax return and reports directly on your 1040. 

If you have an LLC that is not a disregarded entity...it files a separate tax return as either an 1120s or 1065. You do indeed have to file separate returns.

The exception would be a qualified joint venture. 

A single member LLC= automatically a disregarded entity . Goes directly on your 1040 on C or E.

A multi member LLC= No longer a disregarded entity. Goes on a 1120S or 1065....which generates a K-1 to Report on your 1040.

Originally posted by @John Underwood :

@Natalie Kolodij I'll give you an example. I have an LLC that is not a disregarded entity. This contains many long term rental properties. These go on Schedule E of my personal Tax return. It passes through to my tax return. I do not have to file a separate return for this.

A Disregarded entity is my ROTH IRA LLC. It does not pay taxes as taxes were paid when the money went into the account and I do not have to pay tax on the gains when I with drawl money after 59.5 (there are exceptions).

Since it doesn't pay tax or have to file a return (there are exceptions) then it is a Disregarded Entity for Tax purposes.

Actually John, Natalie is 100% correct.

What you have IS a disregarded entity. That means there is no separate federal filing. 

Both are disregarded.

If your rentals were owned by a partnership it would not be considered a disregarded entity. 

The determination of what entity you will use should involve both your accountant and attorney to assist in making that decision. 

NEVER(almost) Hold long term property inside of an S or C-corporation. There are very negative tax consequences if done inappropriately. 

Originally posted by @Steven Hamilton II :
Originally posted by @John Underwood:

@Natalie Kolodij I'll give you an example. I have an LLC that is not a disregarded entity. This contains many long term rental properties. These go on Schedule E of my personal Tax return. It passes through to my tax return. I do not have to file a separate return for this.

A Disregarded entity is my ROTH IRA LLC. It does not pay taxes as taxes were paid when the money went into the account and I do not have to pay tax on the gains when I with drawl money after 59.5 (there are exceptions).

Since it doesn't pay tax or have to file a return (there are exceptions) then it is a Disregarded Entity for Tax purposes.

Actually John, Natalie is 100% correct.

What you have IS a disregarded entity. That means there is no separate federal filing. 

Both are disregarded.

If your rentals were owned by a partnership it would not be considered a disregarded entity. 

Maybe I have the terminology wrong. What I am saying is that is this entity still has to be taxed and is included on my personal tax return.

What I am calling a disregarded entity is one that does NOT have to pay tax such as my ROTH IRA LLC. Disregarded for tax purposes. I believe I phrased it.

I have a document from my IRA custodian that says my IRA is a "Disregarded Entity" So did they call this the wrong name or am I interpreting this incorrectly?

The message is still there. I apologize if the terminology was not 100%.

S corps have less legal liability protection than an llc also they have unfavorable tax consequences when it comes to refinancing. The only time you would want to have a Corp is if it’s required like you starting a reit

@John Underwood "Disregarded" refers to on what form the entity's tax information will be included, not whether or not it will be taxed. If an entity is disregarded (e.g. a single member LLC, sole proprietorship, etc), it is included on one's personal return. If a taxable transaction occurred in your Roth IRA LLC (for example, if transaction rules were broken and you therefore lost the tax benefits), this would be reported on your personal return. If you're playing by the rules in your Roth IRA LLC, there's really nothing to report, therefore nothing goes on your personal return. I hope that hopes to clarify things a bit.

Originally posted by @Storm S. :

S corps have less legal liability protection than an llc also they have unfavorable tax consequences when it comes to refinancing. The only time you would want to have a Corp is if it’s required like you starting a reit

An S corp is an LLC...with an elected tax treatment. Same legal liability protection.

There are 10,000 other times you'd want a corp aside from a reit also. 

a corporation with s-corp election has less protection than an LLC with the s-corp election, this is because courts have ruled that your membership or shares in a company are personal property and can be seized by the courts with or without your partner's consent. There are ways around this but it only works for LLC's except for a Nevada corporation.

Originally posted by @Storm S. :

a corporation with s-corp election has less protection than an LLC with the s-corp election, this is because courts have ruled that your membership or shares in a company are personal property and can be seized by the courts with or without your partner's consent. There are ways around this but it only works for LLC's except for a Nevada corporation.

An S corp isn't an actual type of business entitiy- It's an election ON a type of entity. Can you show some of the court rulings, cases, or cite what you're saying?

There are two ways to form an S corp. 

A corporation, with an S election. 

An LLC, with an S election.

The underlying legal entity, is still an LLC. What you're making reference to is shareholder claims in an S corp- this tends to only be applicable with publicly traded entities. Additionally, there are Single member S corps.

And on top of that, there are charging orders in almost all states that can force you to distribute anything owned by the LLC to the owner in event of litigation in much the same way. Only a couple states don't allow this.

And at the end of the day, there are huge tax ramifications involved with how your entity is structured. So advising only to have a Corp If you're a reit is a very limiting, ill advised strategy. 

The tax election status is irrelevant to what I was saying. Yes in ALMOST all states but you can structure your LLC's to get the stronger laws to apply, which you can't do with corporations normally, the only exception is the Nevada corporation. For example, say I own a property in California. I get in a car accident and it's my fault and I'm liable. Using LLC's I can get the strong liability protections laws of Wyoming to apply to my California LLC to protect it. This doesn't work for a corporation.

In Crocker National Bank v. Perroton, a California court ordered the sale with the partners’ consent.

In Hellman v. Anderson, the California court ordered the sale without the partners’ consent.

Originally posted by @Storm S. :

a corporation with s-corp election has less protection than an LLC with the s-corp election, this is because courts have ruled that your membership or shares in a company are personal property and can be seized by the courts with or without your partner's consent. There are ways around this but it only works for LLC's except for a Nevada corporation.

Citation please?  That's like saying IBM has less protection than Bob's Computers (if they both elected S-Status)

No it doesn’t matter if you elect S-Corp status that has nothing to do with legal liability. I’m saying if you form a corporation vs forming a llc the llc has greater liability protection if set up right