LLC confusion

As real estate investors, we form business entities to take advantage of liability protection and take advantage in tax savings. I have always read that if you are flipping real estate, you should do it in a S Corp and hold rentals in a LLC.

The part where I am getting confused is LLC is already providing some liability protection and you can elect to be taxed as an S Corp and have to deal with less paperwork than forming an LLC. Would it not be simple forming one LLC for your rentals and another LLC for your flipping business and just choose the appropriate tax election?

May be I am missing something or am misinformed.

Thank for your feedback.

you are correct. an LLC taxed as S-corp IS an S-corp to the IRS.

LLC is an asset protection device. there is no tax code for LLC, so LLC is not a “tax choice.”

There are no tax advantages to either entity, because business expenses are always deductible. The only exception is that for an entity that has sufficient cashflow to pay a salary, there may be an opportunity to avoid some self-employment tax by using an S-corp.

S-corps, however, have other tax issues that may make it impractical to hold appreciated property in an S-corp.

Note that an LLC taxed as S-corp does not have this problem. It’s still an LLC.

This is why flips and rehabs are usually done in an S-corp or LLC taxed as S-corp (self employment tax savings) and rentals are usually held in an LLC. Of course, an LLC taxed as S-corp will give you the best of both.

To second mcwagner, sounds correct to me as well.

I just met with an estate planner the other nite. Strongly suggests forming an LLC for each rental property. LLC’S are its own legal person seperate from the owner(you).So when formed for your business the LLC is the business you are not. The LLC is the actual person who customers do business with. Any lawsuit against the LLC can go after everything inside it. KEEP IT ALL SEPERATE!

Someone correct me if I’m wrong… I understood an S Corp only to be taxed when dividends were distributed? I thought that was one of the big differences between an LLC and an S Corp… in an LLC, free cash flow is taxed at the owner’s income tax rate… an S Corp can actually hold the free cash (basically equity) and it won’t get taxed until that equity is cashed out by the owner (i.e. a dividend payment)…

For people buying apartments and looking to continually reinvest the free cash into more units, an S Corp would make a TON of sense if the above is infact true…

There is no tax code for LLC.

Therefore, you get to decide if you want to tax it under corporate tax law or personal tax law. You can choose to tax a single member LLC as a C-Corp, S-corp or as a disregarded entity (Sch C or Sch E on your 1040). A multi-member LLC can be taxed as a partnership, C-corp or S-corp. In community property states AND where the only members are husband/wife, you can elect to treat the LLC as a Sch C or Sch E and skip the partnership return.

S-corp is taxed at the shareholder’s personal rate as the income is passed through to the owner’s 1040. In a case where the owner is performing personal services for the S-corp, this income will also be subject to self employment tax.

So the S-corp income has already been taxed when earned. It is NOT subject to tax when distributed. Instead you receive distributions of “already taxed income.”

This is what differentiates S-corp from C-corp (not LLC). With a C-Corp you must receive dividends, which are taxable again on the 1040. Since dividends are not a deductible expense for the C-corp, this results in “double taxation.” The C-corp has already paid tax on the income, which is taxed again when distributed as a dividend.

There are no tax advantages between S-corp and LLC, because business expenses are always deductible. In fact, an LLC taxed as an S-corp is exactly the same to the IRS as an S-corp.

LLC is an asset protection decision, not a tax decision.