I currently have an S-Corp. which owns 99% of an LLC (which owns the property), and I own 1% of the LLC. First, this was set up incorrectly by the person doing this for me as the S-corp should actually own 1% of the LLC. I was trying to do too much at once having the S-corp own the LLC (taxed as a partnership) and act as a management corp. I didn’t realize that one corporation doesn’t have to own the other in order for it to act as the manager and also didn’t need to have a management company so soon for only 2 properties. I am also paying unnecessary multiple tax returns by having the LLC partnership.
Now, I am trying to correct things as much as possible by taking the LLC out of ownership of the S-corp and myself and make it a disregarded single-member entity so that it is recorded on Schedule E of my tax return. How do I change ownership and taxation?
Regarding the S-corp., I don’t want to spend the money dissolving it as it may be of some use later as I grow. I want to put it to some kind of use while paying annual fees and taxes by having it act as the managing company. How do I include this in the LLC’s operating agreement? What is usually a reasonable mgmt. fee?
My plan is buying pre-con/pre-dev. properties and holding 2-3 years. I also may run into property that I may sell in less than a year along the way in which case I may place under the S-corp for flipping purposes.
Please feel free to correct me on misuse of any terms and confirm this plan is optimal regarding my situation.
I appreciate your patience and am trying to answer other questions on this post as best as I can as I learn so I can get the same help in return.
Mcwagner,
Yes, that is all correct. I also forgot to ask if the LLC would be eligible for all of the tax deductions in regards to losses that it takes if set up as described above. Thanks.
Couldn’t the S-corp act as a property manager for the LLC without being a member or even a non-member manager of the LLC. In other words, why couldn’t the LLC outsource property management to the S-corp?
I personally would not go this route because, by paying the S-corp a management fee, you would be converting passive income to the LLC to active income to the S-corp – resulting in a higher tax bill after the self-employment income tax is factored in. That said, you may have some compelling business reasons to go down this path that we are not aware of.
Dave T,
I am not generating any income at this time on this property under the LLC. I am also about to acquire another property which will also not be generating any income, only losses until I sell them in 2-3 years. I can just leave the S-corp completely out of the picture for now if you think that is the best route.
your operating agreement should specify the mechanism for a member to “buy out” another member’s share. If you have one, follow it.
There should be no problem with the 1% member buying the membership interest of the 99% member. It’s not a distribution or dissolution. Other than the sales price, no taxable event is triggered.
You will need to apply for a new tax ID number for the disregarded entity now that it has only one member. And file a “final” return for the partnership, even if it’s zero.