My question is why do people run their corporations as an LLC over an S-Corp?
I have read quite a bit on S-Corps and LLC’s and see no benefit to an LLC over an S-Corp. An S-Corp can have only one owner where as an LLC needs to have multiple ‘members’. Some states won’t even recognize the LLC if it only has one ‘member’ and will pierce the corporate veil (i.e. liability protection) to revert it back to a parntership (which other that the liability portion, is the only difference between an LLC and a partnership).
S-Corps can disburse their earnings in the form of Salaries and pass through income. The pass through income is not subject to the 15.3% Social Security / Medicare tax. ALL of the earnings from an LLC are subject to the ‘self-employment’ tax.
S-Corps are corporate entitities just like LLC’s and have exactly the same liability protection afforded all Corporations they are just taxed differently (read no double taxation on dividends like a C-Corp).
There are some negatives to S-Corps that LLC’s don’t have and that is that only individuals can have ownership in an S-Corp so if you have companies investing in your business then it’s not an option. LLC’s also have a higher basis to deduct losses than an S Corp unless you finagle the money and lastly an S-Corp has to pay all of the shareholders the same based on their ownership in the company unlike an LLC which can have a ‘member’ who ‘owns’ 50% but only makes 25% of the income, an S-Corp divies up the pass through income based stickly on the shares owned.
So, why do people pick an LLC - Am I missing a valuable bit of information that would swing it the other way?
My question would be then REO, why is an LLC nicer to hold in versus an S-corp.
I’ve heard the same things about you buy and hold in an LLC and you flip in an S-Corp. But WHY? Seems to me the S-Corp has all the advantages that an LLC has - the income the LLC generates is subject to self employment tax but passive income from a K-1 wouldn’t be.
Yes, the LLC allows you to be taxed as a partnership (an LLC is a partnership or in some states can also be a sole proprietor) however this is BAD when taxes come due.
ALL income that passes through an LLC is taxed as self-employed income and as such is subject to an EXTRA 15.3% self employment tax. An S-Corp distribution is in the form of a combination of Salary (subject to 15.3% Self Employment Tax) and Passive income which is completely exempt from 15.3% Self-Employment Tax. So tax wise the LLC is less advantageous.
your LLC protects your property from you.
if you are in a car accident and someone gets a 2 million jugdement against you,
they’re are going after your assets.
if you incorporate your LLC in nevada, the only recourse against your is a charging
order. if set up properly, this means they get to pay taxes on the profits that are
earned but not necessarily distributed. ie. they pay taxes on money they still haven’t
collected and they also don’t have control over the LLC.
however if you own a C corp, they might be able to force a partition and get a ownership
of your shares in it.
someone please correct me if i’m wrong, which i might be. my legal knowledge is shallow
and vague.
They cannot come after your shares of a C-Corp. The whole point of a corporation is that it is a seperate legal entity and only that entity’s assets could be liquidated. They can’t come after your shares of a C-Corp (they could sue the Corporation and make those shares worthless though, but they can sue your LLC too).
Unless there is a case for neglegence on the part of the Corporate Officers (ex: Enro, MCI Worldcom) or a similar situation, you can’t be held personally liable for damages levied against your C-Corp, S-Corp, or LLC. Even in an LLP only the General Partner has unlimited liability.
My point is that an LLC is just a liability protector and not a tax advantaged organization over a sole proprietorship or partnership.
So, why pick LLC for holding properties and S-Corp for flipping them. Why not just use the S-Corp for both?
i said the LLC protects your properties from you.
a corp doesn’t.
in California a judge can force partition of a C-corp. ie. you now must turn over your shares in
the corp to a creditor and you’re now out of the picture. they own the corp and its assets.
I don’t think anyone has suggested using C-Corps for rental properties. I’m questioning why you wouldn’t use an S-Corp. A C-Corp is CLEARLY the worst example of how to structure your corporation for our purposes (although at times, it would become the only option available).
As for your California example - Forcing you to give up your shares of a corporation or bankrupting the corporation, what’s the difference? I don’t doubt that California has some querky B.S. laws, but the C-Corp or LLC or S-Corp designation doesn’t matter in your example. They can force the corporation to liquidate it’s assets and then the creditors have first right of refusal on the value, but that’s true of any corporation or business. So liquidating the assets or seizing the assets permanently (same effect in the long run) is the SAME for LLC or C-Corp in your example. The main difference between being incorporated versus a SP or Partnership is the PERSONAL liability.
I just know that my Attorney always says it is easier to flip under a s-corp and hold in a llc and you all know how I work Do what you do best and outsource the rest!!! I have never understood all the benefits of this all I know is I do not need to know all about ths if he does and can set it up for a few hundred bucks!
With an S-corp, you have to pay people – at least on paper – a fair market salary for the job they’re doing. If the money’s not there, you generally defer the salary. With an LLC, though, the owners are essentially self-employed. So, if you make more money than fair market salary, in an LLC, you’ll be paying extra employment taxes, because all of your income will come as “self-employment” income, whereas in the S-corp, anything over fair market salary is a profit distribution, not “wages”, and only subject to your normal income tax, not employment taxes.
But paying more in employment taxes isn’t necessarily a bad thing. Tracking and filing quarterly payroll taxes is a lot of recordkeeping, and it costs you time, and perhaps money, to do. On the other hand, with an LLC, you’ll have to make your personal quarterly estimates, but you only have to actually calculate and file your self-employment tax with your personal tax return.
So purely based on taxation considerations, if you’re expecting to make about fair market salary or less, you’re probably better off with the LLC. If you expect profits to be enough higher than fair market salary to justify the additional payroll record-keeping costs, then S-corp makes more sense. There are also some differences in flexibility re: ownership, but those generally only apply with larger numbers of shareholders.
An LLC, if it has two or more members, is treated as a partnership for federal income tax purposes. Thus, like an “S” corporation, the profits and losses “flow through” to its owners. On rental activities, these profits are not subject to self employment tax (an LLC which engages in “buying and flipping” may not be considered ?passive? activity and thus subject the members to self employment tax. Thus, a corporation may be better than an LLC for this purpose).
http://allbusiness.cityfeet.com/article.asp?ID=1288&CenterID=31&CatID=2434
In a nutshell, if you are an LLC member, you must pay self-employment taxes on your share of the profits if any one of the following conditions apply:
* You work more than 501 hours during the LLC’s tax year;
* Your LLC offers professional services in the areas of consulting, health, law, engineering, architecture, accounting or actuarial science;
* You are allowed to execute contracts for your LLC;
http://allbusiness.cityfeet.com/article.asp?ID=1288&CenterID=31&CatID=2434
In a nutshell, if you are an LLC member, you must pay self-employment taxes on your share of the profits if any one of the following conditions apply:
* You work more than 501 hours during the LLC’s tax year;
* Your LLC offers professional services in the areas of consulting, health, law, engineering, architecture, accounting or actuarial science; * You are allowed to execute contracts for your LLC;
So, like I said you are paying self employment taxes on your share of the profits since you are allowed to execute contracts for your LLC (lease agreements, contracts with contractors, notes payable, etc. these are all contracts which you are executing). The point here is that you’re not a limited ‘partner’ in this business and are subject to self-employment taxes on ALL earnings generated through the LLC.