I have several LLCs, but since RE is my only income source, I need a corp to use for my flips to avoid IRS dealer/RE Pro. classification. I do Sub2s, Lease Options, rentals, buy and hold, Short sales, and some assignements/flips.
Some say C corp is better, some say S corp. I’d like to be able to deduct health insurance for my wife and I, but don’t welcome all the extra paperwork. I know I have to do something soon! What’s the best case you can make for a C corp over an S corp, or vice versa? If you tried them both on for size, which did you settle on? And do I really need to pay a lawyer to set it up?
First, use an LLC. Simpler form with fewer hassles, plus provides better protection than a true corporation. Corporate stock is an investment that can be awarded to a judgement creditor. LLC membership is personal property and cannot be awarded to a creditor. Both protect the owner from liabilities arising within the entity, but only the LLC protects the entity from personal liabilities of the owner.
Having said that, you can choose to tax the LLC as a corp (or S-corp) to get the protection of the LLC with whatever tax strategy you desire.
Tax:
flips are ordinary income (not capital) subject to income as well as SE tax. Total tax bite is around 45%. The only way to reduce this through an S-corp is IF the company makes enough money to pay you a reasonable salary. IF you receive salary, additional distributions can be made free of SE tax; saves 15%.
If you can’t pay a salary, C-corp provides a lower tax rate (usually 5% or 15%), but cash taken out of the company is taxed as a dividend at 25%. This may still beat 45% in the S-corp.
Keep in mind that there are other ways to “get cash out” without taking dividends. Think: 401k, company car, health insurance, medical reimbursement, child care reimbursement and other benefits. If the company can “pay” you enough through other means, you may not need to take cash out.
Also, S-corp treats fringe benefits to shareholders as income. Thus, health insurance, for example, will be taxable income to you on your personal return. C-corps generally allow better benefits.
No, you don’t need a lawyer to set it up. You do need a good operating/management agreement.