LLC Or S-Corp?
My three siblings and I inherited from my Dad some real estate (farms with some rental homes) and a hardware store. All are in eastern NC. A small portion of the land is suitable for commercial development, being at an interstate exit. We have formed an S-corp for the hardware store, and one of my brothers is currently running this store. The question is should we transfer ownership of the real estate into the S-corp or should we form a separate LLC for the real estate. I favor the LLC (based on advice from my attorney), but my oldest brother (executor of the estate) favors keeping things simple by putting the real estate into the already existing S-Corp. Future plans for the real estate are 1) sell some small tracts to individuals for residential purposes, 2) potential commercial development of or sale of some land near the interstate exit, 3) holding most of the farm land and renting it for farming purposes, 4) ongoing rental of three homes on the farm property, 5) potential sale of timber, and 6) passing things on to the next generation which consists of five grandchildren. Any advice?
Short and simple - LLC is better for holding rental real estate, S-Corp is better for holding rehab/non-rental real estate.
I am assuming the executor will want to settle the estate. Hence the assets need to be moved into something so that the estate can be wrapped up.
Ignore the specific vehicle question to start. Consider how the siblings want to be connected in the future. Does each one want an equal share in all or would one or more want specific assets? The hardware store is largely a different beast from the other RE possibilities.
Once you get a handle on how to divide the assets fairly then the right vehicle can be used. There will be a tendency to 'keep it simple' which might really mean 'delay the problem until it bites you'. There are issues of control when it comes to how decisions will be made. Each person's tax situation might imply a different form of ownership. The liability of a RE development project is pretty different from running a retail store so firewalls between the assets is a good idea. You will also find that some family members are naturally more risky when it comes to liability (doctors get sued more then a factory worker for example).
You also should consider what happens the next time someone dies. Does the next generation step in and how would control work them?
It might sound complicated to your brother. Mostly because it is more complicated then not considering the differences. It is really a risk/reward/responsibility trade-off. It does not have to be complex while still being more then just pouring everything into the S corp.
John
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