Which corp would be better choosing inside an LLC? I hear information about LLC being the way to go but what about choosing your tax situation inside the LLC?
I will be “flipping” my inventory. It will be me and my spouse.
Any other info i need to supply you with let me know.
thanks, Phil
if you choose to be taxed as a corp - S is the way to go - with C - you’ve got to deal with “double taxation” - best to talk with a CPA who knows real estate.
C-corp give you the lowest tax rate if you plan to leave the cash in the company (avoids “double taxation” on dividends)
if you want to take the cash out, then disregarded, partnership and S-corp are the same unless you can afford to pay yourself a salary…and all the hassles that come along with payroll. in this case, you can potentially avoid some SE tax with the S-corp.
So if I wanted to continue my rehabbing and “flipping” business and let the company build its self then a C-corp would probably be the way to go so that the Co. canbe self containg. One question, in a C-corp I give my self a salary does the co. pay all the SS and medicare? And if so what would be better, paying twice on SS and MC or taking the SE tax through the S-corp.
I"m confused, all I want to do is grow my business and (for now) take only what I need to sustain on during the month and leave as much profit in the company to eventually not need to borrow or at least have cash available until I could get a larger portion.
I hope that makes sense.
Thanks Phil
I’ve been thinking about the same basic things myself.
Personally, this is what I’ve figured out is best for me so far…but I’m still in the research phase. I already own a couple entities, but they’re for my other business. But in regards to real estate investing this is what I think is best…
HOUSES I FLIP - S.Corp - Why? Primarily because I can give myself a salary of say $80k a year, and any excess profits go to myself or other shareholders via a dividend payment at the end of the year…and we take advantage of the lower dividend tax rates. If the future Democratic govt body decides to get rid of the wonderful dividend rates, I can keep the s.corp or revert to a c.corp and take advantage of a whole new slew of tax benefits
HOUSES I BUY & HOLD - LLC(s) sole prop. w/ extra insurance - Why? Mega pass through taxation advantages & ease of transferrability of assets between LLCs/LPs [e.g. for passing on assets to children]/myself
NOTE: If you have few assets to start with, just start out as a sole prop w/ insurance and go from there. You can always incorporate or form an LLC in the future. Just remember you have a finite amount of time to become an s-corp after filing your articles of incorporation
phil,
In a typical W-2 job, your employer withholds a portion of your salary to pay social security and medicare taxes. The social security tax is 12.4% and the medicare tax rate is 2.9%. The employer pays half and the employee pays half.
When your own S-corp or C-corp is paying you a salary, the payroll taxes are still split between the company and yourself. The federal government is still paid its social security tax at 12.4% and 2.9% for medicare. It is just shared equally between you and the corporation.
When you a sole proprietor, you are both the employer and the employee. You pay both halves of the social security and medicare tax. These payroll taxes are what is called the self-employment income tax. If you add the two tax rates together, you will see that the total payroll tax is 15.3%.
The payroll tax rate does not change whether your income is earned as salary from a C-corp or S-corp, or whether earned as a sole proprietor.
Hope this helps.
Dave T - you are right but missing the one benefit available with an S corp - You have to draw a salary that is “usual and customary” and pay the taxes on that amount. Anything over and above, which you may take as a draw, are not taxed the employee amount of the social security and medicare taxes. So as an example, if the IRS would consider a $30k salary usual and customary, then you can draw amounts over that and save about 9% of the taxes on those amounts. Could be a large benefit if you could afford to draw an additional $50k, so, definitely one to still consider. :smile
osuidoc,
You are partially correct, but that was not part of the question. The question only focused on who pays the social security and medicare taxes on salary taken from a C-Corp or from an S-Corp.
For the S-corp, any net income that exceeds the reasonable salary taken by the owner, is passed through to the owner as a dividend free of all payroll taxes.
Thanks everyone for the information.
I did not realize that the 12.4% was shared, I was thinking that the employee payed that as well as the employer
What if you did not take a salary?
Is it better to take a salary than to take dividends?
And I assume that dividends are paid out at the end of the yeay only and not monthl or quarterly?
Is the dividend taxed at your personal fed and state income tax?
My consern is that at the begining I will not be able to give myself a “usually and customary” salary. In this case what do you suggest?
Thanks for all the great feedback!
The discusions bring things to light that I was not thinking about.
Thanks Phil :beer
man, lots in here. I need to check in more often. Maybe in May!
some thoughts on the prev posts.
just start out as a sole prop w/ insurance
no one should ever own investment property in their own name. it’s like painting a target on your head. entities are cheap and easy (like my first girlfriend, but I digress) protection for your personal assets.
If your rentals are spinning off $80k of free cashflow every year, I want to meet you. Paying yourself via payroll is a hassle. Unless and until you can afford to pay yourself a salary, S-corp is meaningless to avoiding SE taxes. Until then avoid the hassle.
Losses are better taken in an S-corp, partnership or disregarded tax plan (pass thru to reduce personal income).
You don’t want to accumulate losses in an LLC taxed as C-corp and then switch to S-corp, because you will not be able to take advantage of the accumulated losses. careful planning is a must.
You can choose to tax an LLC as a C-corp, and switch to S-corp later. Of course, you can’t change back for 60 months.
you should be aware of the significant differences between LLC and corp (or S-corp) that make LLC a stronger entity. You can choose S-corp taxation for the LLC, gaining the best of both.
So If I wanted to buy my first flip and cannot afford to give myself a salary but still get protection what would I do?
from everything that i’ve read and done - i can tell you that for me, forming an LLC has been expensive, but worth it. it’s expensive in NY, because of the state fees associated.
however, for my partner and i, the LLC has made things easier for me to do book keeping, and i reduced my personal income by over $1900.00 this year and likewise for my partner (50/50).
i’ve purchased a digital camera, flown to NC and made several other business purchases.
this year, i’m about to buy another digital camera and a lap top - all business expenses (and they’re genuine business expenses).
i’ve also logged over 1100 miles of business travel on my car.
now, i know many of these things can be accomplished even through a DBA, however, a DBA does not provide any “asset protection” and leaves you, the owner of business and/or real estate - wide open for money hungry scoundrels.
for me, the LLC entity is EASY TO MANAGE. i also founded reixchange.com Inc. - now this we set up Subchapter S - “S-Corp” - but managing it - paperwork-wise - has been a hassle - it’s just a lot to tend to and take care of.
you’ve got Board Members, Share Holders and meetings that must be documented. now this is easy for the person who’s done it before, and i know alot of people who own corporations and don’t have a CLUE what the heck they’re doing. that’s not good.
so, if you’re not so savvy with the Corp - LLC is easier to manage and provides “asset protection” - but again, this asset protection only holds up with the services of a good lawyer, and almost more importantly - the owner’s note-taking and attention to EVERY DETAIL of business operations.
:biggrin
TMCG, is there any specific way you have to document your laptop , and miles (on your personal car im assuming) in order to deduct them. I also assume your car is in your own name and not the llc. Did you purchase the laptop on an llc credit card or personal card?
Just curious as to how these get recorded, taxed etc.
Thanks.
hey phat,
mileage - i bought a booklet for 6 bucks at Office Max. it spells it out pretty easy.
laptop - on business credit card.
but if you don’t use the business credit card (you don’t have one) or you don’t have LLC or other entity set up yet, just keep receipts and type out an expense sheet for it, payable to you, by the business.
as for deductions in general, it’s best to let a good cpa take care of them. but it’s up to YOU to know what and how to track everything. i know my cpa doesn’t hold my hand by any means. i’m the capt of this boat. if it sinks, it’s not going to be my cpa who’s at fault, just as when it sails full-throttle, it will be my doing, not cpa’s or lawyers, etc…