The attorney recommended I do option #2. He said that trusts would be very expensive.
I don’t know your situation. I gave you my opinion. Expensive is a word people throw around when they don’t want to do the work involved or don’t know how. What does he call expensive? A basic trust is not difficult, especially for a person with a small estate.
We didn’t get into the actual cost of the trust. Are you talking about a land trust or some other type of trust?
By the way, I do appreciate the advice you provide here.
I’m talking about a trust to own the LLC. I like to set up trusts for the benefit of kids with the parents as trustee. The trust owns the business and the kids get the benefits.
*** NOT LEGAL ADVICE, ONLY LEGAL INFO ***
The S-corp. is a good choice because of the tax advantages. The liability protection is the same as the LLC. It may not protect against a charging order, but that is a very remote risk IMO.
I guess I’m missing the difference between an s-corp and an LLC taxed as an s-corp. I can see the value of the s-corp if one wishes to take a company public one day, but that doesn’t apply to the typical investor. I would recommend an s-corp over an LLC in states where corporations have lower costs than LLCs.
Not a tax lawyer, but my CPA set up my law business as a P.C. (professional corporation), which is an S-corp. for IRS purposes.
I am the only shareholder and the only employee of the PC. The PC pays me, the individual, a small salary. The IRS says this salary has to be “reasonable,” but it can be small. My salary is $2000 per month, so I pay FICA and other employment taxes on that amount.
Anything I make beyond the $2000 per month is taken as a dividend or capital gains, so I do not have to pay employment taxes on my earnings over $2000 per month. That is where the tax savings are, because you cannot do that with a single-member LLC, and it’s fuzzy as to whether you can do it with a multi-member LLC.
There are some other benefits to this structure, like being able to make medical expenses 100% tax deductible with a high-deductible medical savings account, that I do not believe are available with the single-member LLC because it is a disregarded tax entity.
But again, consult your tax professional and not a real estate lawyer.
I get it now. You have a PC, which is a different beast from an LLC.
Hey, don’t give up now you guys. I like it when lawyers argue. Plus, I just made popcorn.
It’s not a “nominal” salary that gets you around the self-employment tax issue with an S-corp; the salary must be “reasonable.”
Some factors considered by the courts in determining reasonable compensation:
- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements
- The use of a formula to determine compensation
I also had an IRS agent tell me that his guidelines stated that salary must be at least half of S-corp income.
However, for most real estate investors, having sufficient cashflow to pay a “reasonable” salary for a part-time property manager/maint person is a problem.
As I stated in my original response: [Therefore, for most real estate investors,] there are no significant tax savings to be achieved from having an entity, including an S-corp.
because you cannot do that with a single-member LLC, and it's fuzzy as to whether you can do it with a multi-member LLC.
Yes, you can. A single member LLC can be taxed as a Corp or S-corp.
Likewise a multi-member LLC. The reasonable salary provisions apply to owners who personally perform services for the corporation, irrespective of how many members there are.
Thanks Mark, I thought a single-member LLC was a “disregarded entity” by the IRS, no? Do you have to elect S-corp taxation?
yes, it requires an overt election.
Drew,
A sngle member LLC defaults to a disregarded entity unless the taxpayer has elected corporate tax treatment.
A multi-member LLC defaults to a partnership, unless the members elect coporate tax treatment.
In community property states, when a husband and wife are the sole members of the LLC, the LLC defaults to a partnership unless the members have elected tax treatment as a disregarded entity or as a corporation.
In case anyone here is interested, I asked the attorney I saw whether the manager of an owner-managed, single member LLC (i.e. doing your own property maintenance instead of using a PM) could be sued individually for something that occurred at the property. He told me no, they cannot do that, they can only sue the LLC. So that should provide some reassurance.
He’s saying you have no personal liability for your own personal actions that cause an injury if you are acting on behalf of the LLC? You could run a red light on the way home from the Home Depot getting supplies for the LLC, kill someone, and you aren’t personally responsible? You have a good case for malpractice if he tells you that. There is no limited liability for personal actions. If your personal actions cause an injury, you are personally responsible, regardless of any entity involved.
The example we discussed was if the tenant had a slip and fall accident in the house and was injured. He said they would have to sue the LLC, not me personally.
You would be personally liable if you had a duty to maintain the area where the tenant fell and did not do so. You are not automatically liable, but nothing says you can’t be sued personally along with the LLC. Everyone gets sued: the LLC, the manager, the owner, and anyone with just a tangential relationship to the area where the tenant fell.
hmm, well I don’t know what to believe now. He was very insistent that they could not sue individually in that situation.
Anybody can sue anybody else for anything. Whether it gets dismissed or goes to trial is another matter. Just remember this basic fact about liability. If your personal actions caused the injury, you are personally responsible. It’s that simple.
Entities don’t change that fact. Acting on behalf of the business doesn’t change that fact. Entities don’t provide some magic shield for you. The liability isn’t transferred from you to the business. It is extended to include the business. Google the term vicarious liability for a better understanding.
Do your own research to learn what constitutes liability. Stick to legal sites and places that aren’t trying to sell you something.