:help
I have rehabbed and sold 2 homes already and I am finishing up my third. It is time to register a business for my flipping, but I do not know which structure is best for me. In the past, I was told that LLC is the way to go… I went to a seminar last year that told me that C-Corp is the best way to go now.
Also, what state should I register the business in? Which state is the best for tax and asset protection combined?
I am looking to use some hard money, as well as some regular investor bank mortgages. I have heard that it is harder to get a loan with an LLC and the banks want a personal guarantee on the loan.
Any help would be greatly appreciated! Have a great day! :biggrin
Contrary to what you hear on the commercials, there are no tax or protection benefits from registering in another state. It usually creates more headaches than it solves.
Second, you need to understand that LLC is not a tax choice; it is an asset protection choice. Once you have made that decision, you can then choose to tax the LLC as a C-corp, S-corp, partnership or sole proprietor (Sch C) depending on the circumstances.
I would always recommend an LLC as an entity. Just because the recordkeeping is simpler and the tax options are more flexible. In a multi-member LLC the asset protection is significantly better.
You don’t want to tax the LLC as a C-corp. You can’t get cash out of a C-corp without double taxation OR converting it to W-2 salary. In fact, the ONLY time you would EVER want to be a C-corp was if you needed to take advantage of the higher pension benefits beyond what’s available to normal humans.
You may want to tax the LLC as an S-corp if you expect it to spin off significant cashflow. If there is enough cashflow to pay a reasonable W-2 salary, then additional income may save you some Fica/medicare tax. I’m talking siginficant cashflow here, at least in the $75 to $100k range.
Outside that, rehabs are ordinary income and not passive. So there is no real income or tax difference between the entities.
Will I have to pay self employment tax or SS tax with a LLC taxed as a S-corp?
Why is there a benefit of the S-corp tax structure if the company is bringing in 75k/100k+?
Is there any situation where the Flipping profits are taxed as anything other than earned income? say capital gains?
…what if the property is rented for over one year, and then sold? Would it be long term capital gains or earned income on the profit?
Should I use land trusts if possible for flips?
Sorry I have so many questions. I want to set up this company asap. Thanks in advance.
Will I have to pay self employment tax or SS tax with a LLC taxed as a S-corp?
Generally, yes. But see below.
Why is there a benefit of the S-corp tax structure if the company is bringing in 75k/100k+?
Distributions and other payments by an S corporation to a shareholder must be treated as wages to the extent the amounts are reasonable compensation for the service rendered to the corporation. “Wages” means social security and medicare tax applies.
In other words:
IF the S-corp pays a reasonable salary to the shareholder for time devoted to the S-corp, THEN additional distributions can be made to the shareholder and NOT be considered as wages. This will save the social security and medicare tax.
The key here is reasonable compensation for service rendered to the corporation. Some factors in determining “reasonable” compensation:
training and experience
duties and responsibilities
time devoted to business
wages paid to other employees
what comparable businesses pay for similar experience doing a similar job for similar hours
etc.
A full-time construction/rehab manager would probably make $40k to $60k in most parts of the country. Unless the S-corp is creating $75k to $100k of free cashflow per year, the S-corp will not have sufficient cashflow to pay a reasonable salary to the shareholder and still be able to make non-wage distributions. If you can’t make a non-wage distribution, then there is no tax to be saved and no point setting it up that way. In addition, there’s the hassle factor of setting up a full blown payroll (paychecks, EFTPS tax deposits, state and federal unemployment, W-2’s etc) which can be significant.
And yer gonna have to rehab a lot of houses to do $75k a year.
Is there any situation where the Flipping profits are taxed as anything other than earned income?
No.
say capital gains?
No.
...what if the property is rented for over one year, and then sold? Would it be long term capital gains or earned income on the profit?
No. If the intent is to flip/sell the house, then rents are considered “incidental” to the flip business. Ordinary business income, full freight tax.
You’re either in the rental business or you’re in the flip business. Pick one.