As a single member llc can you still elect to be taxed as a S Corp? Thanks
Yes. No problem.
BTW, you do still need to in the end pass the S corporation eligibility rules… i.e., your “stockholder” needs to be a US citizen or permanent resident or something very similar to this, you need to have only one class of stock, and so on.
Stock?
Even though treated as a corporation for tax purposes, an LLC does not issue stock, does it? After all, it is a company not a corporation.
Please clarify for those inquiring minds that want to know.
In a non-tax legal sense, you would have “interests” in the LLC as laid out in the operating agreement. BUT those interests would have to meet the requirements otherwise applicable to stock in an S…in other words, one class of stock/interests. For example, having interests that voting & non-voting would create two classes of stock/interest & would run afoul of the S-Corporation rules.
Hyre
Actually, the one class of stock isn’t violated by differences in voting. (See Reg. Section 1.1361-1(1)(1))
Rather, the one class of stock rule is violated when owners have different rights to distributions and at liquidation. E.g., a deal where some owners have preferred returns… or where the lead investor gets a backend kicker…i.e., many of the things that real estate partnerships would tend to do.
The logic behind this is that the S corporation (which is any entity that’s made an S election) needs to have a really simple and straight forward way to allocate profits to the owners… based on the ownership percentages. Boris Bittker in his classic tax tome, “Federal Income Taxation of Corporation and Shareholders” provides a good background discussion of this one class of stock rationale.
Also, a member interest in an LLC can be considered stock in an S corporation. Note that according to tax law, in a sense, an LLC member interest is always treated as something else… such as a sole proprietor’s capital account… or a partner’s interest in a partnership, etc.
Thanks for all the responses. I’m not sure I completely understand, but what I am trying to get at is the best way to set up my llc and pay the least taxes. I understand that a single member llc is treated as a disregarded entity by the irs and reports in business income on a Schedule C and pays self employment taxes. This llc I am creating will ONLY wholesale properties, would electing to be taxed as a S corp and avoiding self employment taxes (as long as I pay myself a “reasonable” salary) be better than not? And by the way I live in Nevada if that makes a difference. Thanks again.
Your understanding is correct for wholesaling.
Better? Best? that’s subjective. It CAN save you taxes IF
a) the company makes enough to pay you a salary
b) you want to deal with the hassle of payroll
c) the company makes enough extra income to be able to make distributions in excess of salary.
until then, keep it simple. you can change your tax election later.
So with a single member llc how do you pay yourself if you don’t make enough to pay a salary?
the 50% you keep after income and SE taxes.
Thanks so much to everyone. I really appreciate all the advice. Thanks again. :biggrin
A multi-member LLC taxed as a partnership (you and a trust) would have better tax treatment. There are no employment taxes and other hassles that come with a corporation.
Keep in mind that single member LLCs have no charging order protection in a bankruptcy and that a creditor can force you into involuntary bankruptcy for a relatively small amount.
single member LLCs have no charging order protection in a bankruptcy and that a creditor can force you into involuntary bankruptcy for a relatively small amount.
This is not true in TX. By statute single-member LLC’s receive the same treatment as multi-member LLCs.
Flip or wholesaing income is business income and will be subject to SE even with partnership taxation of the LLC. (unless he is not personally active in the partnership business, which is unlikely with the other partner being a trust)
What is your cite for the TX treatment? Bankruptcy is Federal and the Albright case already provides case law that charging order protection does not apply. COP exists to protect partners from the personal liability of one partner. In a single member LLC, there are no other partners that are adversely affected by dissolution of the LLC. On the other hand, the creditor does not get relief if a charging order is upheld in the SMLLC. I would be very interested to read a TX case where the judge ruled Albright does not apply and upheld charging order protection.
In re Ashley Albright, 291 B.R. 538 (Bankr. D. Colo. 2003), the debtor, who filed a Chapter 13 bankruptcy petition that was later converted to a Chapter 7 liquidation, was the sole member and manager of a Colorado LLC at the time of the filing. The LLC was not a debtor in bankruptcy. The Chapter 7 trustee contended that because the debtor was the sole member and manager at the time the debtor filed bankruptcy, the trustee now controlled the LLC and could therefore sell the real property owned by the LLC and distribute the net sales proceeds to the bankruptcy estate. The debtor argued that the trustee acted only for the debtor’s creditors and at most was entitled to a statutory charging order (against distributions made on account of the debtor’s LLC membership interest) and could not assume management of the LLC or sell its property. The court referred to the Colorado LLC statute, under which the debtor’s membership interest constituted the personal property of the member. According to the court, “[b]ecause there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate, and the trustee became a ‘substituted member.’” Id. at 540. The court also stated that, “upon the Debtor’s bankruptcy filing, the Trustee now controls, directly or indirectly, all governance of that entity, including decisions regarding liquidation of the entity’s assets.” Id. at 541. The court reasoned that because there were no other members in the LLC, no written unanimous approval of the transfer was necessary, as would be the case under Colorado law if there were other members - no matter how small such other membership interests may be.
Bankruptcy courts generally look to state law to determine whether dissolution occurs upon the bankruptcy of the sole member of a single-member LLC. Delaware, for example, specifically states that bankruptcy does not automatically dissolve the LLC. Colorado’s law was silent on this point.
I’m not sure I understand the context of the exerpt. It looks like part of John Murray’s article on LLC assignments and I agree with the analysis. SMLLC membership interests of the debtor go to the trustee and, barring an operating agreement to the contrary, the trustee can assume control of the LLC and liquidate the assets to pay creditors.
It’s not an automatic dissolution because some statutes, like the DE LLC Act, leave open the possibility of an OA that prevents an assignee from assuming the management duties of the debtor. He only gets distributions of the debtor member, but the statute does not provide the charging order protection. The operating agreement does. Without such clauses, the trustee can dissolve the LLC. Most of the acts of which I am familar, like DE, do not allow a BK trustee management rights unless there is unamious consent of the other members, but it doens’t really apply to a SMLCC since there are no other members. I’ld be appreciative if you could point me to a statute with staturory protections for the SMLLC (as opposed to those created by the OA) as I believe most states base their statutes on the ULLCA.
I’m not saying SMLLCs are useless or a bad idea. They have a place and can be effective in some situations. I like to use them in conjuction with other entities to create a liability shieldswithout the need for another tax filing. What I am saying is that they have an uncertain outcome in debtor/creditor situations and are not as strong as the multi-member in cases of BK,especially when it is the only planning in place. Creditors are getting smart and trying to get a personal judgement against the member because that gets them access to the LLC assets and the member’s personal assets. Albright would have been decided differently if she had done better planning.
People do themselves a disservice when they use low cost LLC operating agreements or discounted organizing services. The agreements I have seen from office supply stores, document mills, internet samples, etc. don’t cover this type of sitution (or other advanced topics for that matter) and as I said earlier, it’s the operating agreement that protects the single member in BK, not the statute. Given these facts and the history of SMLLCs, using a multi-member LLC, instead of the single member, provides an additional layer of protection in case the OA is not as comprehensive as it should be.
I’m sorry I didn’t respond to your taxation comment. Can you explain why an LLC split 99% trust (or other entity as a passive member) to 1% individual and properly set up to justify such a split would subject the individual to the same taxation as owning the LLC 100% as an individual? I know it’s more complicated, but the additional taxes can eat so much of the profit that it makes sense to look at ways to minimize the bite.
BLL,
I think one of the things that you may be discounting slightly is the ability make elections to have the LLC treated as a C corporation or S corporation.
Even though I publish do-it-yourself kits for people so they can setup LLCs on their own, I recommend they get an attorney involved if they’re interested in the LLC primarily as a liability minimization thing…
On the other hand, if someone is interested in an LLC primarily for tax reasons (electing S status, for example). I think you can clearly do that yourself.
Can you explain why an LLC split 99% trust (or other entity as a passive member) to 1% individual and properly set up to justify such a split would subject the individual to the same taxation as owning the LLC 100% as an individual?
What kind of trust is it? I was assuming a grantor trust, where the trust income would appear on the individual’s 1040. I may be wrong, but I don’t think this would get around the SE on the ordinary business income.
I’m going to have to disagree with you on the benefits of entities to investors who don’t have $10,000 to spend with an atty.
Yes, if something tragic happens and a plaintiff can afford to hire Johnny Cochran, a SMLLC will get smashed. But when Nancy Neckbrace trips on your sidewalk and visits Arnie Ambulance Chaser, the first thing he will do is an asset search. Getting those assets out of your name makes his job harder. Time is money for ole Arnie. If he can’t spot an easy target, he is much more likely to just move on. Nancy doesn’t have $10,000 for a retainer…
I’m thinking some kind of irrevocable trust set up for estate planning purposes (not self-settled by the way) or a revocable trust set up with the beneficiary as someone other than the guy doing the flip/wholesale work. May be even an SD IRA or an entity owned by one.
I tend to agree with you that a grantor trust with the beneficiary as the guy doing the flips/wholesale doesn’t avoid the taxes, but I have seen people push the case by declaring the intent of the LLC as buy/hold or long term investing and then authorize quick sales via resolution to increase liquidity, build reserves, finance better investments, dump dogs, or anything else that will justify a quick sale in light of the declared intent to avoid dealer status.
I don’t know if you see this in your practice, but the investors around me are switching to tax reporting on the 1065 because of its lower audit rate relative to the schedule E and think there’s less risk this way when they push aggressive strategies. I think anything is OK until the IRS says no (e. g. Private Annuity Trusts), but I’m not the guy paying the bill if/when these guys get called. I like to push things, but I tend to do things that have some basis in code, case law, PLR, or some other authoritative ruling. What I won’t do is tax evasion or fraud. There are too many legitimate ways to reduce taxes without resorting to that.
It’s OK we disagree. The dialogue is good and everyone learns by seeing other opinions.