I am a beginner investor with two houses down and working on my third sale. My wife and I buy,rehab, and flip fixer-uppers. I would like to know the best way to go with forming a business entity for liability purposes. I was leaning towards LLC until I started reading some of the posts on this forum.Most of you sound like you’ve been around the block a couple of times, so I thought I would ask for some opinions on this before I take a plunge.
Thanks.
I feel that an LLC with a C-corp to suck all the profits out is the best way to go.
;D
Bruce
LLCs are subject to a franchise tax in Texas. Some people use the limited partnership entity.
In Texas, the LLC is fine while you are just getting started, because there is no franchise tax owed until gross receipts exceed $150,000 per year.
If you are making $50,000 or more in profit per year, you should consider forming a limited partnership (or converting to one), because there are ways to set that up so that you pay zero franchise tax.
Spend a few bucks and get help from a lawyer. It’s worth it in the long run, but it can be tougher than all get out to find a lawyer with real estate expertise.
I thought if you are rehabing then S-Corp is the best way to go…
Use your Roth IRA to acquire properties in trust and avoid income tax on all the gain…forever.
Da Wiz
Exactly how would he then take the distribution prior to turning 59.5 years old without paying taxes on the gains?
Do you mean that he should use his Roth IRA and hold onto the money, because then you’re right, but you can’t ‘live’ off the money until then.
I love how you tell him what to do do when he asked about flipping houses without mentioning if he wanted to re-invest all earnings or take a portion as income for the immediate term.
my understanding is Gary is a Turst guy who sells and makes his living with trusts. For this reason he will always reply with going toward trust when it makes no sense…
It does not matter if he answers the questions or not as long as he plugs his trust… that is all matters to him
DFI
If a trust is suitable, I recommend it and I don’t “make a living” with them. I have never sold or charged anyone to set up a trust. I use them to acquire and manage properties. So take your understanding and stick it.
Da Wiz
denbeck – I’m not a tax expert. I do know that the Roth IRA is a great vehicle and not knowing your age, I recommended it. Good luck to you.
Caught this thread and had a comment:
DFW:
GENERALLY it is the best opinion of REI to put properties in land trust. There are very few times that this would not be the case, so please elaborate as when that would be the case.
Gary:
The SELF-DIRECTED ROTH IRA is going to be the next hot item that is going to be in our arsenal of weapons. Using this will probably work for about 5 or 10 years until people start squaking that this is unfair and its a big loophole, and try to have it closed up. THAT SAID, am I going to use it?? You can count on it !!! You can only put one property in this according to IRS rules, and I doubt that’s going to change.
Don’t worry, even my boss, a 20-year tax service owner and CPA had to have it explained to him. He had heard of it, but not explained as I had done so for him. We can all learn something new every day…
Kevin
I always recommend the LLC form for one reason - ASSET PROTECTION.
Corporate stock ownership is considered an “investment” that can be seized to satisfy a judgement against you personally. This puts the adversary in control of your business and its assets.
An LLC is considered “personal property” and as such (in TX) is not available to satisfy judgements to creditors.
Both forms protect you personally from liabilities arising within the business, but only the LLC protects the business from your personal liabilities.
Having said that, you get to choose how your LLC will be taxed: as a sole proprietorship(single member LLC only), partnership (multi-member only) or corporate (either). Corporate taxation can be further defined as a C or S Corp.
Having a LP requires a GP (usually a Corp) to assume the liability. This is a costly option in terms of administration and hassle and only allows one taxation option in the partnership, plus you have to also manage and tax the corp GP.
C-Corp tax rate is lower, but if you want to pull out cash in the form of dividends, it gets taxed again at the personal level (the “double taxation” issue). May not be an issue if you want to reinvest the proceeds anyway.
Sole proprietor or partnership taxation will be subject to SE tax on top of the personal income tax. So, if you expect wads of income, this can get expensive.
S Corp income is taxed at the personal rates (higher) and can avoid SE taxIF the corp pays you a reasonable salary. Then you can take excess cash as a distribution with no tax issues. This one does require some “maneuvering”, but can result in significant tax savings overall if you want to pull out cash.
Mark Wagner, CPA