Type of Corporation for Property Management Company

2 Replies

Hi All,

My wife and I brought our first investment property back in April.  Prior to purchasing the property we created an S-Corp to put the property under.  When we informed the bank (Wells Fargo) that we wanted to put the property under an S-Corp we were told that they no longer allow it.  The mortgage needed to be kept under an individual. 

We now learned the importance of having a property management company to reduce our liability. Should we use the S-Corp for as our property management company? Does anyone have strong feelings against this? Would an LLC be better? What are your recommendations?

Thanks,

James

My recommendation would be to find a competent business attorney and CPA who are both experienced with real estate and investment properties.

My personal preference is to own my rentals in an LLC and you may want a separate LLC or S-Corp for the management business. But that's just my opinion not advice!

I'm a newbie so take what I say with a grain of salt, but I recently met with an attorney asking the same question. She told me that both LLC and corporations have the benefit of limited liability, but with regard to taxes, s-corp (which can be a LLC with s-corp tax election) is usually better for active income (like flipping or wholesaling) and LLC taxed as a sole proprietor is better for buy and hold. She explained that s-corp helps reduce the amount of self employment tax by passing some of the income as dividends which doesn't have SE tax, but since rental income doesn't have SE tax that this benefit doesn't apply and instead the "reasonable salary" you must pay yourself, would incur payroll taxes.

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