Fair enough. Although the creativity part doesn’t make alot sense to me given the scenarios we were presenting in the beginning. Given that most investors here own all or half of an entity that they create it’s highly unlikely that they would generate different income percentages than their ownership percentage would indicate. I.E. If you own you own S-Corp or if you are a partner (correct term is member, but for the sake of discussion I’ll say partner) then you won’t generate inequitable amounts of income relative to your partner.
Given the nature of the smaller investors that must personally guarantee their loans then the basis for an S-Corp and for an LLC would be the same. Also given the possibility of NOT personally having to guarantee their loans once the S-Corp establishes credit worthiness on it’s own, then that is MORE asset protection than the LLC. If the business goes belly up - you are not personally responsible for the debt that you would be as an LLC. So, I can see an LLC in the early stages, but if you’re in the $5 million dollar range, why would you want to be personally liable for that debt ? Sure you can take more money out without taxation implications - but then you’re increasing your risk exposure as well. The purpose of setting up these entities was to decrease risk exposure in the first place.
I spoke to my partner and he is 100% certain the a LLC is the route to take regarding owning investment property. He said the only benefit the S-corp would have the SE tax. But the other benefits off a LLC such as:
Appreciated Assets:
On a distribution of appreciated assets S-CORP must reconize a gain while LLC members do not. That is important if you want to distribute the property to family memebers or into another entity.
Step-up in Basis on death:
Definition for Step-up in Basis: The change in the value of an asset inherited upon the owner’s death. The taxable gain is calculated based on the fair market value at the time of death, not the fair market value at the time the asset was purchased.
For Scorp on the date of death the basis of stock can be stepped up, but not the basis in assets. However, with LLCs your assets could be stepped up. All you have to do is make an election (Section 754 Election).
Futhermore, regarding your question about being personally liable, you have the same proctection under LLC as you do with S Corps.
No one mentioned this already. With an LLC versus a Corporation, if you do get sued, the best the creditor can get is a charging order.
From http://www.taxdeferrals.com/llc_is.htm, “Your creditor cannot, and is precluded by law, to step into your shoes as an LLC member and take-over the financial affairs of your LLC. This, in and by itself is a significant financial benefit.”
Later they say, “The “Charging Order” means that your creditor has a right to “all your capital distributions.” When will you have a capital distribution?? Answer: NEVER. You can take salary, joint venture, borrow money, but you will NEVER take a capital distribution. You have just become your creditor’s and his contingent-fee gold digging lawyer’s worst nightmare.”
