Any views on going LLC vs S-Corp. I live in Illinois
and I’m a beginner in the investig field. My goals include flipping and also purchase income properties to hold on to.
Any views on going LLC vs S-Corp. I live in Illinois
That “rule of thumb” will only give you a sore thumb.
You cannot make a tax distinction between an LLC and S-corp because there is NO TAX CODE for LLC. As a result, you get to choose how you want your LLC to be taxed. You may choose from: sole proprietor (“disregarded entity” Sch C), C-corp, S-corp or partnership, depending on how many members you have in your LLC.
Flipping is not passive income. For a disregarded entity, partnership or S-corp. it will be regular income subject to income tax (at your personal rates. all of these show up in some place on your personal return) and self employment taxes. IF the S-corp pays you a reasonable salary, you might avoid the self employment taxes on the excess.
C-Corporations pay their own taxes, so you avoid the self employment tax, but any distributions will be taxed again at the personal level (the "double taxation issue with corps).
So, from a tax perspective, pick whatever tax strategy makes the most sense for your goals. But don’t be duped into believing that there is a tax “difference” between LLC and something else. There’s not.
However, I must point out a VERY significant difference between the asset protection of corporations and LLCs.
Corporate stock is considered an “investment” whether it’s IBM or Gnapolitano, Inc. And investments can be siezed to satisfy a judgement against you personally.
Member interest in an LLC is considered “personal property” by statute. As such it is NOT available to satisfy judgements against you.
So when you rear end someone in a Pinto, get sued and lose, an adversary can be awarded your “investments”, take control of your corporation and it’s assets including the investment property. However, assets held in an LLC will not be available to satisfy this judgement.
Both a corporation and an LLC protect you personally from liabilities arising within the entity, but only the LLC protects the company from your personal liabilities. That’s a BIG difference.
In my opinion, no one should own investment property in their own name. and LLC is the way to go.
This info was very useful. So far from all the other forums I plced this question to seem to say the same thing. Thank You
Good post, mcwagner!
What is the benefit of ever creating a corp then? Why not just create a LLC and have it taxed as a corperation? Seems that an LLC is the “best of both worlds”.
Start as an LLC. You can make the S corp taxation election at a later time like when you make more money. It doesn’t have to be done right away. That’s the best of both worlds.
it depends on what your investment strategy is.
an LLC will not be the best choice for say a syndication. a corp holds title to real property differently than an LLC. the taxation may be the same (electing S status for the LLC), but how the asset is held can differ alot.
I believe when you create your LLC you have to determine at that point if it will be taxed as a C-Corp or S-Corp. I perfer a C-Corp, even though it taxed higher and you do not pass the income to yourself personally like a S-Corp. But you have much better secuirty and asset protection in the C-Corp. Each company has different tax advantages.
I have been investing for over 5yrs and used the same CPA the whole time, and with his methods of a C-Corp and setting it up in NV, though I live in FL, I have lowered my taxes considerable over what associates pay keeping their corps in Fl or using S-Corps on similar incomes.
My advice is create 2 companies. One a holding company and the other a management company. The holding company will just buy/sell/hold. The mgmt company will collect rent, make mortage payments, take care of all the properties, pay the bills, and take all the deductions for interest payments, negative cashflow if any, pay your basic personal expenses like health ins, car payments, cellphone, meals, trips, auto expenses, internet, etc. This will ofset much of the cashflow you earn, since your personal bank account can grow. Also when the holding company sells a property and makes a profit you can LEGALLY pass the income over to the mgmt company as a management fee any time you want. This will create an expense for the holding co to equal its income, givin it no profits, but yet a loss at the end of the yr due to depreciation of all properties in its corp(you can carry a loss for 2yrs as well on both corps) and the income (which was captial gains orginally) is just income to the mgmt company so not taxed at 25% or 27% I think it is now. Also with all the expenses coming out of the mgmt co you will really make more money in some ways and you can still pay yourself a salary or pay a bonus when needed.
Would you recommend both of the companies being LLC’s and would insurance on BOTH be a smart move?
insurance on any company is a good thing.
So then, couldn’t your “hold” company be a standard Florida LLC and your management company be the NV C-corp?
Why would the hold need to be anything else than an LLC if it just pays a management fee and takes depreciation? With the LLC you can pass the depreciation right through to your income taxes right? Am I missing something here?
Thanks for the info too!