Why LLCs beat Corporations in Real Estate

Why use an LLC partnership instead of a Corporation?

LLC-partnerships avoid the following corporate disadvantages by default (automatically);  by election;  or by planning. When referring to a partnership the term “partner” includes a member of an LLC or more specifically of an LLC-Partnership. Such reasons not to use corporations pertain to both rental keepers and resale flippers.

1. IRS AUDITS: Corporations (C and S) are audited more than partnerships and corporate audits are on the rise. For instance, corporations are fairly frequent targets on the issue of reasonable compensation (discussed in number 4 below).

2. COSTLY DEALER STATUS: Corporations are designed for active (ordinary income) businesses. Thus, using a corporation (C or S) for quick-sale flips is a blatant admission of costly dealer status and impairs dealer-avoidance planning. 

3. PAYROLL FILINGS: Corporations (C or S) are subject to more payroll filings because corporate shareholders are employees and must receive a reasonable W-2 salary. In the case where there are annual tax losses in the corporation, a W-2 salary could cause unnecessary taxable income to shareholder-employees. How costly! 

4. IRS SCRUTINY OVER “REASONABLE COMPENSATION” TO “C” OR “S” CORPORATION SHAREHOLDER-EMPLOYEES. Reasonable compensation essentially means that the combined amount of wages and fringe benefits cannot be disproportionate in relation to the value of the work being performed.

Learn more about Entity Structure at WealthBuildingCPA