Question for the experts or those with Experience.
My business startegy is to rehab properties and then sell them as quickly as possible. What is the best way to set up the business ie, LLC, Corporation, S-corp, so I can pay myself a salary, or owners distribution, while limiting the amount of taxes to be paid. My ultimate goal is to turn this passion of mine into a full time career. I have completed 3 rahabs as my personal and then sold them. I lived in those houses for more than 2 years, so I avoided paying any tax on the profits. The family is getting tired of moving so I need to find another strategy.
For me, setting up the correct business entity is the most important decision in the success of the business. How have experienced investors gone about this?
Thanks
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 Ryanrehabber, 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: Superior asset protection and flexible taxation.