I am new wholesaler getting ready to apply for an EIN and file incorporation members. For wholesaling purposes what is the better entity to have…I’ve heard LLC is better than a C Corp and vice-versa…Can anyone shed a little light as to which is better and why? Thanks
Hi,
An LLC (Limited Liability Company) is an entity that acts like a corporation but allows you to pass profits and loses through to your personal taxes.
An LLC can also file and submit it’s own tax return if you set it up that way!
An LLC allows you to pay yourself from profits without being taxed double.
A C-Corp is a independant enity which operates on approval of it’s directors which represent it’s stockholders (owners). This enity always does it’s own corporate tax return. When you pay out profits it is either a dividend on the per share profits or it is earned income payed as a salary or hourly wage.
Both methods of distributing profits are after tax which means the corporation still pays taxes on all of it’s income then you also pay taxes to recieve it as an individual, thus double taxation.
If you are trying to create a company you intend to sell or go public with a C-Corp is the best method which creates stock value.
If you want to operate a company with protections of a corporation but pay everything made in profits to yourself a LLC is the correct method allowing pass through to you individually.
GR
An LLC is better if you need the LLC income or expenses on your personal return. If not, the c-corp can be a better choice. There is no double taxation if you remove funds via benefits programs.
GR,
Please clarify this for me. I had always understood that a corporation’s payroll was deductible to the corporation (therefore pretax), while dividends are paid to shareholders post-tax.
Thus, it is my understanding that the double taxation you refer to in your example would only apply to the dividend payments.
dividends are not deductible for corporations and taxable to the individual. thus double taxation.
salary is deductible to the corp and taxed only once to the individual.
certain benefits are deductible to the corp and not taxed to the individual, thus even better.
which is better (LLC, S-corp, LLC taxed as S-corp, C-corp, LLC taxed as C-corp) is a question of facts and circumstances. I would always recommend a LLC taxed as “whatever” over an actual corporation. Less hassle of corporate formalities, marginally better protection and still retains 100% of whatever tax structure you choose.
Mark,
Can an LLC-taxed as a c-corp use the same type of retirement and benefits programs as a c-corp? I wasn’t aware they could, but then again I’m not a tax guy.
an llc taxed as c-corp IS a c-corp to IRS. everything applies the same.
Sounds like there’s no reason to go with a c-corp unless you plan to go public. I always thought VEBAs and ERISA plans were only available to a c-corp.
I do have a high income client who was looking for a way to defer income in excess of 401k/SEP limits. We put him into a defined contribution plan in a C-corp that got his deferral up almost to 100k.
I guess I’m still confused. Can the LLC taxed as a c-corp have the same retirement plan? I was under the impression it couldn’t and only a c-corp could.
an llc taxed as c-corp IS a c-corp as far as the IRS is concerned. LLC is only a distinction at the state law level. There is no tax code for LLC. Thus, if you tax the LLC as a C-corp, then it becomes a C-corp to the IRS and all the regular C-corp rules apply.
Thanks, Mark.
This is a very good topic.
I also have a question in regards to an S-Corp vs. LLC. Please clear this up for me. Is it true that a S-Corp has more protection for the individual owner when it pertains to his personal property than does a LLC?
What are the advantages and disadvantages?
dlmcgill
Both are pretty much the same if the owner is also the main employee.
Then if the owner is the main employee, there is no beneficial reason to change, correct?
Yes, but I would dissolve the entity to save the expense.
Hi BLL:
I’m not sure I understand what is meant by ‘dissolve the entity’. And why would you dissolve it? Thanks in advance.
dlmcgill
Dissolve means filing paperwork with the state saying you will no longer use it. It’s like a corporate death certificate. Don’t forget to file the final tax return to let the IRS know.
Why do it? Every year the entity must file an annual report and comply with corporate formalities. Many people have to pay for a registered agent. What does the entity or owner get for this cost? Not much. Since the owner is the main employee, any actions that create a liability are most likely caused by the owner/employee and his personal assets will be available to pay any judgment. There’s no tax advantage since business expenses are always deductible.
A DBA allows the individual to operate in the name of the business without all the hassles and has the same benefits.
It depends, what you want to do with it. Do want to do more than wholesaling or is this just for wholesaling. I have a corporation and I plan to use it for wholesaling, holding , leasing residential and later commercial property. You need to talk to real estate lawyer or business lawyer, they specialize in entites. Don’t do any thing before you talk to a lawyer. In the mean time read Rich Dad, Poor Dad book about coporations, LLC and other entites, ( I forgot the title) it explains alittle more about this.
I agree with BLL EXCEPT for high cash flow businesses where the owner is able to take advantage of distributions in lieu of salary, and certain employee benefits.
In general terms, the LLC is a stronger form in that charging order protection provides the entity protection from personal liabilities. Corporations (including S-corp) do not. This distinction does not apply to single-member LLCs.