Sole Proprietor or LLC?

Hi, I purchased two homes last year and I am renting them both with positive cashflow. Year 2006, planning on purchasing 8 more. I wanted to know since I am purchasing and renting them out should I create a business (service) property management company (which would only consist of me, however, I would pay fees to contractors on work that is beyond my knowledge.) First, should I create a service type business as oppose to creating an investment company, and Secondly, should the company be a sole proprietor or LLC. Which would give me the best tax advantage? And should I create two companies instead of one to keep the money moving?

Thanks in advance,

Howdy Irogers:

Most investors try to avoid the self employment taxes as much as possible. I am not sure setting up two companies will help here or with any other tax savings. Just more forms to fill out.

If you are only doing this for tax reasons, then the reasons need to be advantageous to you. If you can use the business entity to convert after tax personal expenses to pre-tax business deductions, then a business entity to manage your own investment rentals may make sense.

By creating an LLC to manage your own rentals, you are converting passive income to active income which bring payroll taxes into play. In the absence of some other overriding benefit, this may not be a good idea if the end result is that you end up with a higher tax liability.

If you are doing this to create a business entity that may allow you to contribute to a Keogh or SEP-IRA, write off life insurance premiums, and/or medical insurance costs, then you have benefits that outweigh the active income tax treatment.

A talk with a good CPA may help you explore the advantages and disadvantages of the different business entities that may be suited for your investment strategy.

First off, always consult a CPA or certified tax specialist that deals in real estate primarily. Look for a CPA that is an investor themselves since they will have more knowledge generally on tax savings.
During your dicussing with the CPA, you need to go into what benifits you need out of your company. Its not always about the taxes since you may need other things met such as certain expenses, health insurance, etc.

As for me, I have 2 corps…I have an LLC which is meant for Holding, Buying and Selling. That is its only function and it makes no money ever. There no taxes. Then I have a property management company that is a C-Corp that manages all my properties. I use the C-Corp for my expenses as well ad to fund a SEP IRA as well. My C-Corp bills my LLC on a quater basis a management fee to assure I have no profits in the LLC. Keep in mind you can carry a loss for 2 yrs so when I sell an a property in the LLC I try to have no money in there and take the money out thru management fees. Both my companies are also set up in NV, though I deal in FL only.

Personally you would want your properties in an LLC since it will protect you from lawsuits which is its main goal. Asset Protection is the most important thing when holding real estate.

I agree that asset protection is the most important thing in real estate. However, transferring title directly to the LLC in many situations would certainly invoke the DOSC. The property is still partitionable realty and subject to liens and encumbrances.

Assigning beneficial interest to the LLC after creation of a land trust is an unrecorded event and has an added benefit from a lender’s standpoint, of a clean chain of title, avoiding any seasoning issues assuming your intent is to refi at some point. In addition, the trust is very solidly protected and shielded from actions associated with any party’s: past bankruptcy; creditor claims and civil judgments; litigation in marital dissolution; Probate actions…and even state and federal income tax liens.

In my opinion, combining an LLC with a land trust is the best asset protection you can get. Good luck.

A sole proprietor and a single member LLC are taxed exactly the same. Form the business entity to provide some measure of asset protection, rather than some elusive tax advantage.