Setting up an S-Corp and LLC, take a look at this package

General Real Estate Investing
1

I’m looking to form a S-corp and a LLC in Nevada

S-Corp to buy at wholesale or short sale, repair, then sell

LLC - Which I will use to hold properties.

For about $5,000 this is what I’m going to be getting if I form the LLC and S-Corp with this company.

-LLC and S-Corp with State Filings
-Building corporate credit and build it up to Triple A credit, and set up corporate credit with the five major credit card beaurus
-Corporate Record Book Services, to make sure that the business is in compliance with The Nevada Revised Statue 78.0297

Of course there’s other stuff like unlimited corporate consulting. But what do you guys think of this package? I want everything to be done right so that there will be no big issues in the future.

Also, while, I am setting up an S-Corp, the rep advised me to have the S-corp to buy and sell real estate and also be a managing company, that also manages the LLC.

Since I am buying and selling real estate, should I be concerned with the IRS, and the dealer issue? I’m still not understanding how that works, if it’s a good or bad thing.

2

You need a CPA and you can ask them the questions about which entity for each type of transaction.

$5k is a lot of money to pay for this service. It only costs about $600 for each corporation you incorporate.

You can pay for an online record service. You say what form you want, fill in a few blanks, form is automatically generated. It saves you all the typing. I think that’s $200/year.

3

The LLC and the S Corp costs $300 to setup up for each one. The money for the other stuff is above forming the LLC and S-Corp. LIke compliance and corporate credit building.

4

you’re getting screwed.

  1. You don’t need NV. Form an entity in your home state. Cheaper, easier.

  2. the only thing that gives your entity “credit” is to borrow and repay. no one, NO ONE can “give” you credit with some credit card company.

  3. You’re getting bad tax advice as to how your LLC is taxed.

  4. If you buy and sell, you are a dealer. period. As a dealer, you don’t get to take advantage of lower capital gains tax rates - everything is taxed as ordinary income.

  5. You don’t need an S-corp and you don’t need “corporate record book services”.

their business is separating people from their money.

5

Hi,

NV is my home state.

  1. If you buy and sell, you are a dealer. period. As a dealer, you don’t get to take advantage of lower capital gains tax rates - everything is taxed as ordinary income.

With that being said, how much will I be paying in Cap Gains tax? Everything is taxed as ordinary income considered a good or bad thing?

  1. You don’t need an S-corp and you don’t need “corporate record book services”.

So you’re saying, I’m better off doing a LLC and just don’t get an S-corp for not buying and selling houses? Also, it’s not a good idea to keep it seperate? Form a S Corp for flipping and LLC for holding?

6

If you buy and sell, you’re a dealer. It’s like selling widgets, but your “inventory” is houses. This is ordinary income and is taxed at regular tax rates for individuals and companies.

If you buy and hold (rent), then your rental income is passive income, which is not subject to self employment taxes.

Later, when you sell your rental, if you make a profit, it will be a capital gain. Cap gains rates are usually lower than regular income tax rates.

Ordinary income tax is neither “good” nor “bad”, just recognize that all buy-and-sells will be ordinary income and not capital gains.

It gets complicated when you buy and hold some properties and buy and sell others, but that is beyond this post.

The “rule of thumb” about S-corp for flipping and LLC for holding is hogwash. There is no tax code for LLC, so you can elect to have it taxed as a sole proprietorship, partnersnip, C-Corp or S-corp, depending on your tax preferences and other specifics. In other words, there is no tax comparison between an LLC and anything. It’s taxed however works best for you.

So, why do you need an extra S-corp? Advantages? No tax benefit. Some marginal additional protection from having a corp manager of the LLC, but realistically, your signature as “president” vs as “manager” won’t make much difference to an enemy atty. Disadvantages? more onerous documentation requirements for a corp. paperwork hassles conducting business between the two. extra tax return. All disadvantages with no real benefit.

Owning property in an LLC provides superior asset protection with fewer hassles and flexible taxation.

As for keeping things seperate, it does simplify things a bit to keep your buy-and-hold properties seperate from your buy-and-sell properties (the dealer issue above). but then what happens when that nice house you decide to rent receives an offer to buy that you can’t pass up? Oops. it’s in the wrong company. So, that’s not really realistic, either.

I would recommend a single LLC. If you get 3-4 properties, then consider another one to isolate your holdings from each other. Simple, cheap, effective.

7

Mark,

A sale of the nice house that is in the rental “company”, that baldyguy attempted to rent but accepted an offer to purchase instead would still be treated as the sale of investment property. It is the primary intent behind the acquisition that determines the tax treatment. If baldyguy purchased the property within his rental “company” and begain marketing the property for rental use, then his pattern of activity supports the determination that his primary intent was to hold for the production of income, especially if he has shown a disposition to hold all the other property in his rental company (indefinitely) for the production of income. The IRS will allow the sale of this property to be treated as an investment sale rather than a dealer disposition.

Intent behind the acquisition is not so clear when everything is conducted from within the same entity and the preponderance of sale activity is deemed to be dealer dispositions. The risk is that the occasional sale of an investment rental will be tainted by the dealer activity and also deemed to be a dealer disposition rather than an investment property sale.

Is the “tainting” issue a sufficient concern to pursuade you to consider at least two entities, one for the active income activity and a separate entity for the passive income activity?

8

Ah, did he attempt to rent it or just change his mind? When does intent attach? Actions speak louder than words.

All true, and valid concerns. You are correct that if the preponderance of activity is of one particular type, that goes to intent. So there is some benefit from having two entities – as long as – you know in advance what you’re going to do with the property so you can transact in the appropriate entity. AND nothing unexpected comes up that messes the plan.

But tainting can still occur from unexpected events because that will be determined on a case by case basis rather than just “what entity is it in”. First thing they say is,“but you sold it.” Minds change. You didn’t really try to rent it. So, have you really helped yourself? It was unexpected and now it’s in the “wrong” entity.

I usually tell folks to document document document: Keep copies of advertisements for the property for rent, type of insurance you buy, and anything else that will establish intent. THAT is more important than the owning entity.

I’ve never had a problem mixing dealt and held properties in the same entity, but I do expect sufficient documentation.

Having said all that, for an experienced investor with a clear plan, yes, multiple entities are important (for dealing, asset protection, some financing arrangements, lots of reasons). However for the bald guy, he’s just getting started, doesn’t have a clear plan where he’s going much less a strategy for getting there. I think for him one entity to get the properties out of his name, simplify his bookkeeping and remove the entity choice decision from his worries. When/if he’s ready, we can always add another.

Your thoughts? Everyone does have a different expertise and experience on the “best” course of action.

As always, a pleasure to chat with you, Dave. Thanks for keeping me on my toes!

9

Hello Mark,

Here is my strategy.

Right now I have 5 deals under contract in which all of them are going through the short sale process.

When the bank approves my short sales, i plan on repairing the houses if need and then flipping them out. I want to build cash so that I can start buying rentals and holding them, and that’s what I plan to do with the LLC.

As for the S-Corp since I’m flipping, there isn’t a real need for me to have asset protection since I’m not holding any of the properties.

10

so right now, one entity works great. If you ever do buy-and-hold, then that’s the time to evaluate your business structure. And you don’t need an S-corp; just more LLCs.

You don’t need asset protection? So, you’re 100% sure that you will never be involved in an auto accident? Where perhaps you are sued for running that red light, breaking little Suzie’s neck leaving her permanently disabled? Trust me, your auto and liability policies aren’t going to touch the judgement that Mama’s going to get. You own’em - they’re available to satisfy a judgement. The LLC owns them, they’re not. Holding them in an LLC isolates them from the risk that YOU represent. Risk that can take away all of your hard-earned work in an instant.

Are you sure that little Johnny isn’t going to see that big, empty house as a nice fort to play in? So that when he breaks thru the patio door and gets brain damage and Daddy sues the property owner - the LLC - don’t you want that little extra bit of protection? You personally weren’t negligent: you locked the door. So wouldn’t you want the suit to stop at the LLC rather than putting all of your personal assets, cash and other investments at risk?

Man, I would. Protecting what I’ve earned is important to me.

11

Hello Mark,

About the asset protection, I meant that since I’m using the S-Corp for flipping, there isn’t a need for asset protection. But on the other hand if I was holding properties, I would need it. Hope that clarifies it.

Interesting article I was reading about entities.

http://www.reiclub.com/articles/choice-of-entity

12

when you repair it to flip it, don’t you own it?

what makes you think that owining it to flip it is any less risky than owning it to rent it?

13

What about workman’s compensation, if a worker gets injured while working on your property. Sure you’ve checked his policy, but what if the worker let it lapse? This is a very real concern from an asset management perspective.

Besides, an S corp doesn’t help avoid the “dealer” status since the S is transparent from a tax point of view. C corps or LLCs are better for rehabbing (IMHO).

14

joel-investor,

I am confused by your comment. Would you please clarify where you are coming from on “dealer” status and how your choice of entity can make a difference?

15

With all this being said about the S-Corp, what about paying yourself a reasonable salary? Can this be done with the LLC? Any tax advantages or disadvantages?

16

Yes, I believe the LLC treated as an S-Corp for tax purposes enjoys the same reasonable salary opportunity to manage your self-employment income taxes as the formal S-Corp. Profits in excess of salary can be declared to be a dividend.

Perhaps Mark will confirm.

17

My understanding is with a LLC you can be taxed as a corp or just have it treated like personal income. So in theory you could pay yourself a reasonable salary.

I will say one thing a S-corp lets you do is combine IRA and non-IRA cash. Since with an S-corp you get shares of stock to sell. With a LLC, you’d have to have an IRA LLC and a non-IRA LLC. Maybe if you do the LLC as an S-corp you can still combine the two. Maybe our local CPA can answer that :slight_smile:

18

An LLC taxed as an S-corp is, for tax purposes, an S-corp.

It avoids the “stocks owned” asset protection issue of a true corp, and gains the tax advantages of the S-corp.

Well, there are some tax rules that don’t apply, but generally it is treated as an S-corp.

Of particular interest should be a 401(k) for your LLC. It has higher contribution limits than the IRA, contributions are deductible for the LLC, and it can be self-directed to roll your contributions back into real estate investing. Or take a look at the new Roth 401(k) - with the higher limits of the 401(k) but contributions are made after-tax, so earnings are never taxed at withdrawal like the Roth.

think about that. it’s pretty powerful.

19

Hi Mark,

What about the reasonable salary? How does that work with the LLC?

20

same as with the S-corp. If the member is paid a “reasonable” salary, meaning consistent with similar positions at other companies for the experience and skills of the employee, then additional payments to the member can be considered “distributions” and they avoid self employment taxes.

Note, however, than rental income is a special kind of income called “passive income”. Passive income is generally not subject to self employment taxes anyway.