Sole Proprietorship Vs. Corporation
Member since 2019 · 1 post · 0 votes
I've been planning to invest in a property to rent it out and I'm not sure whether it would be better to do so as a corporation or a sole proprietor. Are there any tax benefits to creating a corporation?
Hi @Gareth Kindree, please note that Canadian (and Ontarian) taxes and ownership structures are very different than those in the States. I only buy properties in corporations, but that's what works for me. It really is very investor-specific, and depends on what your income, other assets, liabilities, family, etc. look like. Happy to give you a couple of names in Toronto if you're interested.
Depends on a lot of things, whether you hold it long term, short term as rentals whether you do flips and so forth.
I'm not a CPA or attorney, but owned rentals, and have businesses in LLC's, C Corps and S Corps. Each has it's unique advantages and drawbacks, plus my dad owned rentals and was considering incorporating.
If you are just starting, own it personally. There are drawbacks to owning as corporations:
1. Depending on the type of corporation, for C Corps, there is double taxation, you're taxed first as a corporation, or a corporate level, then the profits taxed again as an individuals.
2. If it's an S Corp, depending on your situation, you're likely to have to pay social security on some of your earnings which you don't as an individual as a passive activity.
3. My dad looked into it early on and consulted an attorney. He planned to hold his rental long term and pass it on to his children and was told as an individual, on death, there is a stepped up basis where his heirs do not pay capital gains, but as a corporation, there is no such thing. For instance, he bought a mixed use property in 1963 for $25K and when he passed a few years ago sold for $1.2 million to a developer, it was passed to us on a stepped up basis. I was glad he checked with an attorney back then and was advised not to place it in a corporation. This was in the late 70's and LLC's were not in vogue.
These are the issues that come immediately to mind but there are many others. With constant changes in tax laws, corporate depreciation, taxation all differ from personal, and exact comparisons can be complicated.
I'm not a CPA or an attorney. You should always consult them. I have a couple of rentals here in Omaha. from what I have learned they both have their pros and cons.
I believe the difference in taxes is not that far apart. you can still write off most of the deductions even if you have a sole proprietor since you are holding long term and not doing flips.
Hi @Gareth Kindree, please note that Canadian (and Ontarian) taxes and ownership structures are very different than those in the States. I only buy properties in corporations, but that's what works for me. It really is very investor-specific, and depends on what your income, other assets, liabilities, family, etc. look like. Happy to give you a couple of names in Toronto if you're interested.
I've been planning to invest in a property to rent it out and I'm not sure whether it would be better to do so as a corporation or a sole proprietor. Are there any tax benefits to creating a corporation?
We are assuming that you are talking about in the US. Last I seen the corporate tax rates are lower then personal.
Beyond taxes you should look at the asset protection side of it. Using personal name you are liable for your other personal assets. A corporation is only liable of what the corporation owns in most cases.
If your in Canada then I would recommend what @Claude Boiron suggested
Hello Gareth! I would always recommend an entity that uses legal laws and not to do a sole proprietorship to avoid any personal financial responsibility. Forming a legal entity requires a minimum of paperwork to do yearly as well as start up requirements but they are well worth it if you have any personal assets worth owning. There will usually be a lawsuit and you are obligated to do wvhatever the Judge says, whether it makes common sense to you or not. Good luck to you!
Hello Gareth! I would always recommend an entity that uses legal laws and not to do a sole proprietorship to avoid any personal financial responsibility. Forming a legal entity requires a minimum of paperwork to do yearly as well as start up requirements but they are well worth it if you have any personal assets worth owning. There will usually be a lawsuit and you are obligated to do wvhatever the Judge says, whether it makes common sense to you or not. Good luck to you!
There is a misconception that if you form an entity, any entity, you place your property in it, voila, you're totally off the hook. Absolutely WRONG.
I bought a business via an LLC from an owner who had a business in an S Corp, got the same advice you mentioned above, involved in a lawsuit, sued for $3 million. His S Corp was sued along with him and his wife personally. He tried to get the suit against himself and his wife dismissed due to the fact it' s the "S Corp's problem", and not his, and it was denied.
I got to know the case very well as I hired his employees in the takeover of the business and the employees were called down the give depositions and I gave them paid time off. The only saving grace was the S Corp had liability insurance for $1 million and the policy covers legal fees for the S Corp. He's on the hook for $2 million. Unfortunately, the insurance didn't cover him and his legal fees and he had to get his own attorney.
I was worried enough that I call my insurance agent and was told my policy for the LLC covers the LLC as well as me personally under a separate endorsement. My agent told me 100% of the time plaintiffs sue the entity and the owner because small owners do not know how set themselves up correctly. I subsequently spoke to the owner and he said nobody advised him that. He got the advice that all he needed was the S Corp.
The issue for most owners who go into real estate management is that as long as YOU do the work, YOU do the management, YOU are at risk. For a small multi, if there's a snow storm, YOU didn't shovel, someone got hurt, YOU and the entity gets sued, which is why you need an insurance policy that also covers you. The S Corp or LLC doesn't shovel snow, it's YOU. You're off the hook if you got a PM, with management responsibility, get the snow shoveled, with it's own E&O insurance.
So for small property owners, just starting out, get good insurance. If you feel better with an LLC, the LLC and you both have to get it, and then you have the downsides of having an LLC, such as fees, getting financing, and filing additional returns. I have LLC's for my businesses, especially ones with employees, and deal with the details, but have not for my real estate business,
@Gareth Kindree - The answer to your question also depends on how many properties you're planning to own here in Canada. Having a corporation will make sense once you have 2-3 properties that are producing some cash flow because you'll be paying 1-2k in yearly filings with an accountant. Also in some situations, you can still be personally liable for gross negligence even if the corporation owns the property. For example, if you own a duplex that has a exterior stairwell from the ground floor to the second floor and if the tenant is complaining about the stairwell then you can be liable if that person were to get hurt from it.