Which business entity is best? e.g. LLC, S-Corp, C-Corp, REIT

Question

Although I'm already considering at least one tax preparer I wanted to see what everyone else on Bigger Pockets is doing. Flips are short term and rental properties are long term. I understand you don't want to mix the two.

David Klem · Answer

@Jamie Bateman

Thanks Jamie

David Klem · Answer

Thank you, everyone, for your advice. I'm still studying all opportunities so I haven't decided which REI path to take just yet. Before I do, I will consult with a tax pro who specializes in that area.

Basit Siddiqi · Answer

@David Klemyour initial post is a little vague - are you actually doing flips and long-term rentals?The more information you give the better suggestions people can give...

Ryan Lane · Answer

As always, you would want to talk with your personal CPA who has more intimate knowledge on your situation.

One of the reasons you want to keep these two forms of investment separate is because of how the IRS is likely to treat either. In the eyes of the IRS, flipping is more akin to a normal business (like the act of renting a property or construction), so they typically seek to tax this at ordinary rates. For long-term rentals, however, the IRS is more kind with its tax treatment. They'll treat the holding of the property as an investment acted, subject to the capital gains tax law and regulations.

Now, you could accomplish this using two separate LLCs. LLCs are typically easier to setup and, if structured properly, can provide enough protection. Depending on your situation, a different form may be better for the flipping business, but I would discuss this with your lawyer and CPA. A REIT is really for a more specific type of investment, which I don't think would be beneficial here.

Chris Seveney · Answer

@Linda Weygant

As Linda said ask YOUR CPA for tax purposes and YOUR attorney for legal structure

DO NOT TAKE ADVICE FROM SOMEONE YOU DONT KNOW

Linda Weygant · Answer

There is no cookie cutter, one size fits all approach to this. A good CPA will find out more about your personal situation, such as additional sources of income, long and short term goals, retirement plan goals, etc before recommending a strategy.

Andy Mirza · Answer

We use LLCs for our Funds because we have investors. They are Preferred Members and we are the Managing member.

The people we trade with typically use LLC's or are banks. I don't think I've ever seen an entity with "Inc," now that I think about it.

Christopher Parsons · Answer

I know Mark Kohler has a lot of info on this. You can look him up on YouTube for some free research. From what I understand from the way he structures things, you want a passive side (rentals) and an active side (own a business, fix and flip, wholesale, etc). You would use LLCs for passive side and S-Corp for the active side. C-corps, from what I hear, are really expensive, you'd really only use it if you planned to have your business go public (as in selling shares) or if you were single and basically terminally ill. Haven't really looked into REITs too much other than investing in them myself, so can't comment on that.

As everyone suggested though, check with a CPA, preferably one that specializes in real estate.

Ronald Isgate · Answer

Agree with @Jamie Bateman - you need to sit down with a CPA that has experience with Real Estate investors/investments. The decision will be made based upon your business model as well as your own personal (and possible partners) financial situations. I represent alot of investors, and I never recommend making a decision on which business entity to choose without first getting the opinion of my client's CPA.

Steve Vaughan · Answer

I have an s-corp that owns nothing and more than one MMLLC for commercial properties only. What are you trying to do?

Sometimes the answer is none of the above. I would not try to stuff a residential house with debt inside an entity, especially a corp.

Which business entity is best? e.g. LLC, S-Corp, C-Corp, REIT

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