Why Not S Corp For Rental Investment?

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I know that LLC is the recommended entity for rental investment. My question is why not S corp?

Can I setup Simple SEP with LLC or S corp?

I am aware a few advantages of single member LLC in comparison of S corp:
1. simple filling
2. cheaper
3. no extra form for fed tax purposes.
4. less formality. ie: no need for formal meeting, etc.

I was told that I can setup additional retirement plan in addition to 401K if I have corp. Is that true? Thanks.

Comments(6)

  • jwalko15th May, 2004

    I am considering the same thing. Actually, I am leaning more toward an S-corp rather than an LLC because of the way I was told that banks view LLCs. I am told (from small business owners who are S-corps themselves) that banks tend to treat S-corps more favorably than LLCs when considering them for loans...is this true?

    I plan on meeting with an ATTY to discuss this, but haven't yet, so I won't take any advice as legal advice...just curious.

    John

  • Stockpro9915th May, 2004

    S corps are far superior tax wise. Go to my personal information and look at an article I wrote on business entities.

    [addsig]

  • DaveT15th May, 2004

    You can reduce your taxes while saving for retirement with one of the four main types of tax-deferred retirement plans for small businesses: Self-Employed 401k (a.k.a., Solo-401k, Individual 401k)SEP-IRA SIMPLE IRA Keogh (a.k.a., Profit Sharing Plan, Money Purchase Pension Plan)
    Contact your financial services provider or your current IRA custodian to discuss your options and to establish an account.

    If you are operating an active income business, then you are allowed to contribute self-employment income to a retirement plan.

    Rental property, however, has greater tax benefits to the owner if operated as a passive activity. As a passive activity, you can take advantage of the $25K passive loss allowance against other ordinary income, you can take advantage of capital gains tax treatment on the sale of the property, you can use a 1031 exchange to defer capital gains taxes indefinitely upon the sale of your rental property, installment sale tax treatment is available to you, AND your passive income is not subject to self-employment income taxes.

    You lose all (or nearly all) of these tax benefits by operating your rental property as an active income activity. True, you get to contribute to a retirement plan, but you lose the tax advantages of investment rental property operation while bringing self-employment income taxes into play.

    For holding your investment rental property, the LLC (disregarded entity) is probably a better entity for you than the S-Corp.

    Just my opinion.[ Edited by DaveT on Date 05/15/2004 ]

  • ew8616th May, 2004

    DaveT, thanks for inputs.

    Let me clarify your point:
    Actually what determines whether I can have tax-deferred retirement plans for small businesses or not is the activity (passive vs. active) not the type of the entity (LLC vs S corp). Is that true?

  • DaveT16th May, 2004

    That is my understanding.

  • myfrogger16th May, 2004

    The biggest advantage, in my layman opinion, is not a tax advantage but rather a legal advantage. I am refering to what is called a "charging order." Several states recognize that the excusive remedy for someone who has a claim to an owner of an LLC is obtaining a charging order. This means, in a nutshell, that if you get sued personally that the only distributions from the LLC can get awarded, not ownership of the company itself as with any type of corporation. You can choose, as the manager of the LLC, to not distrubute the profits for that year. Since an LLC is a disregarded entity for taxation purposes, there must still be tax paid. Here you have a situation where the person or company with a claim on the distributions must pay tax on money it never received! Obviously this is favorable as you can settle any claims for pennies on the dollar.

    The charging order is a very powerful advantage of an LLC.

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