LLC Questions: Taxes and Spousal Participation

General Real Estate Investing
1

I’m very close to purchasing my first investment property and thought I’d read-up on LLC’s to see if I should consider creating one first. WOW! A lot of info on this board, and thanks to all for sharing. But, I’ve had a couple of fuses blow while trying to sort through it all. Could someone please answer the following questions for me?

LIABILITY PROTECTION:

I understand that an LLC member is responsilbe for a loan if he provides a personal guarantee, but otherwise, are LLC owners/members protected from personal liability for both business claims and debts? Are LLC members’ personal homes, cars, accounts, etc. are protected?

TAXATION:

With a Single-Member LLC, is it as simple as the business’ profits/losses passing straight through with only a Schedule C and a 1040 to fill out? Nothing else? No Schedule K-1’s, No Quarterly Tax Payments, No Self-Employment Tax, etc.?

SPOUSE PARTICIPATION/PROTECTION:

How does it affect my wife if I set-up as a Single-Member LLC? The LLC’s income/loss just passes through into our joint tax return? Is the LLC considered marital property and all her’s should I kick-the-bucket? If she helps me out in any way (taking calls, showing homes, helping paint, etc.), what does it affect? Any personal liablity issues to consider?

I understand that I could include my wife in the LLC, making it a two-member, but wouldn’t that create a much more complicated set-up, more like a parternship? Wouldn’t that create more paperwork to maintain and file, the need to pay self-employment tax, etc.

Thanks in advance!

2

liability protection: correct

taxation: mostly correct. however, you may also choose to tax a single-member LLC as a C-corp or S-corp. depending on your specific circumstances, one of these tax strategies may benefit you. also note: ordinary income (flips) from an LLC is subject to self-employment tax. passive income (rentals) is not.

spouse stuff: correct. if you’re in a community property state, the LLC membership is considered joint personal property. If you are taxing as a disregarded entity it doesn’t matter - the taxes are the same. She can be a manager of the LLC without being a member, or can be an employee or contractor (if you want to pay her). Just remember to keep the LLC seperate from your personal finances. no comingling.

Having her be a member would require taxation as a partnership, C-corp or S-corp. more paperwork, extra tax return. Partnership and S-corp have no effect on self employment taxes (flips are ordinary income subject to SE, rentals are not) but C-corp would avoid SE in all cases (but distributions would become taxable).

3

Thanks for the info, mcwagner.

I plan to hold long term and rent. I want liability protection with the simplest tax structure possible with the least taxes and paperwork (sounds like a single member LLC), but I also want to protect my wife’s interest in the investments should something happen to me.

Thanks again. You do seem to be the guru on this!