LLC Treated As Ab S Or C Corp?????
Hello to all,
I have finally filled to form an LLC for asset protection on my properties. However I have been told that I must file a federal form 8832 to have the LLC treated for tax purpouses as either an S or a C corp and I don't know what would be best for my situation.
To give you some more information to better help me I guess you should know that I buy subject to ( learned from John Cash) and intend on holding for 2-3 years until my t/b excercise their contract. Also we intend on getting a few pre-construction condos in FL this Spring which we will hold on to and rent for a while once we get the keys.
Does that make me a dealer or an investor???
I just don't know based on my investment strategy which coporation will be best for my LLc to be treated as 
Am I making any sense???
Many thanks in advance !
Susana
Welcome Susana:
If you are buying in a corporation, you need not worry about dealer status.
In terms of what type of corporation works best for you, I would check with your CPA. The new law out for a C-corp enables you to pay only 15% on the first
$50k. If you want to leave the money in the C-corp for future endeavors, you might want to consider one. If you set up an S-corp, the money flows right thru to you personally.
I personally use an S-corp to buy and sell with and keep all rental properties in a trust. You dont want to keep all your troops in one fox hole!
I would advise you to talk with your CPA
about what would be good for your situation. Robert Kiyosaki has a new book out about corporations that might even help you.
Best Riches,
Jeff Adam
[addsig]
the most commonly discussed difference is the simplest answer, in my opinion.
C-Corps. have a tax burden and then when they distribute the money to the shareholders (YOU) it gets taxed again when you file income tax.
So you get "Double taxed".
S-Corp the income flows to you before being taxed. That is why everybody in small business uses them.
Always ask your accountant but I believe that is where the decision begins and ends.
gl.
N.
those were very good answers and appreciate your time.
This is what I was told, correct me if I am wrong ok?
My new LLC will provide asset protection when I use it to buy my sub to properties as the title will be in the LLC name. Now if I elect the LLC to be treated as a C corp, having the C corp as a member of the LLC alongside with myself, it will them become the " flow through" entity for the RE expenses as property management.
Although I understand the concept of having a corp to run my business and an LLC to run my investments I don't see how the numbers work.
If I make $50,000 this year in profits buying properties subject to, minus the expenses ( seminars, marketing, website, lawyer, CPA fees etc...) $10,000, I have a profit of $40,000 left in my LLC that is taxed at my personal income tax level ( my husband makes $130,000+ and we file jointly), so I will be paying the highest income tax on the $40,000 profit.
Rought numbers I know but what I am trying to figure out is how to use entities like an S corp or a C corp to help me selter some more of that money?? Does any here use any of this vehicles as well as LL's?????
I know this is not the most exciting subject but I think is an important one, I hope we get some more answers
Quote:My new LLC will provide asset protection when I use it to buy my sub to properties as the title will be in the LLC name. Now if I elect the LLC to be treated as a C corp, having the C corp as a member of the LLC alongside with myself, it will them become the " flow through" entity for the RE expenses as property management.First, let's define what happens when you organize your LLC as a Corporation. When you file your LLC registration, you elect to have the LLC treated for tax purposes as a corporation. You will not personally be a member of the LLC. A corporation is a separate taxable entity, and will require a tax-ID. You will most likely be an officer of the corporation and a major shareholder (if not the only shareholder). Your LLC will file a corporate tax return (Form 1120) and most likely a corporate state tax return. Your corporation will not be considered a pass through entity. All investors in your business will be shareholders in your corporation.
Quote:If I make $50,000 this year in profits buying properties subject to, minus the expenses ( seminars, marketing, website, lawyer, CPA fees etc...) $10,000, I have a profit of $40,000 left in my LLC that is taxed at my personal income tax level ( my husband makes $130,000+ and we file jointly), so I will be paying the highest income tax on the $40,000 profit.If your LLC is organized as a corporation, then your $40K in net corporate profit is taxed at the corporate rate of 15% on your corporate tax return. If you choose to take a salary from the corporation, your salary is a pre-tax deduction to the corporation but W-2 income (ordinary income) to you and taxed as ordinary income on your personal 1040. The corporation will also deduct its share of the social security and medicare taxes, while your share is deducted from your salary before you get your check. Any money left in the corporation can also be paid out as a dividend to the shareholders. Dividends are paid after corporate taxes and are also ordinary income to the shareholders.
Having your LLC electing to be treated for tax purposes as a corporation will, by default, give your LLC C-Corporation status. You must make a separate election to convert your C-Corp to an S-Corp if this is what you want to do.
I am not an accountant, nor a CPA. Please consult CPA licensed to practice in your state to guide you through all these murky waters.
First of all, thanks so much Dave, I read just about everything that you post, I think you have an incredible source of knowledge and are invaluable to this website.
[quote]
On 2004-02-15 19:42, DaveT wrote:
Quote:My new LLC will provide asset protection when I use it to buy my sub to properties as the title will be in the LLC name. Now if I elect the LLC to be treated as a C corp, having the C corp as a member of the LLC alongside with myself, it will them become the " flow through" entity for the RE expenses as property management.First, let's define what happens when you organize your LLC as a Corporation. When you file your LLC registration, you elect to have the LLC treated for tax purposes as a corporation. You will not personally be a member of the LLC. A corporation is a separate taxable entity, and will require a tax-ID. You will most likely be an officer of the corporation and a major shareholder (if not the only shareholder). Your LLC will file a corporate tax return (Form 1120) and most likely a corporate state tax return. Your corporation will not be considered a pass through entity. All investors in your business will be shareholders in your corporation.
So in that case, if I choose to have the LLC treated as a corporation like you mention above and is not longer then consider a pass through entity, that mean good news people people like myself that are on the highest tax bracket in their personal tax return, right??
Quote:If I make $50,000 this year in profits buying properties subject to, minus the expenses ( seminars, marketing, website, lawyer, CPA fees etc...) $10,000, I have a profit of $40,000 left in my LLC that is taxed at my personal income tax level ( my husband makes $130,000+ and we file jointly), so I will be paying the highest income tax on the $40,000 profit.If your LLC is organized as a corporation, then your $40K in net corporate profit is taxed at the corporate rate of 15% on your corporate tax return. If you choose to take a salary from the corporation,
Do I have a choice??? I mean I don't have to take a salary if I don't want to?
your salary is a pre-tax deduction to the corporation but W-2 income (ordinary income) to you and taxed as ordinary income on your personal 1040. The corporation will also deduct its share of the social security and medicare taxes, while your share is deducted from your salary before you get your check. Any money left in the corporation can also be paid out as a dividend to the shareholders. Dividends are paid after corporate taxes and are also ordinary income to the shareholders.
Having your LLC electing to be treated for tax purposes as a corporation will, by default, give your LLC C-Corporation status.
WOW, good info, I didn't know that.
You must make a separate election to convert your C-Corp to an S-Corp if this is what you want to do.
Dave, that's what I am trying to find out, what's best. Now I know that if I leave it filled as a C corp then the profits earned will be tax at the lower rate of 15%, providing I don't have to take any salary out or pay social security that means I could still keep $34K roughly to re-invest and buy more properties with.
However if I elect to have the LLC treated as an S corp, how does my situation change????
Isn't an S corp considered a flow through entity??? In that case would the $40K be then taxed at our higher tax level, then what are the benefits if you are buying subject to and holding long term to have a S corp????
I am not an accountant, nor a CPA.
Well, I think you know how to explain this issues a lot better than most of them and that's why I am asking you first, I do have a CPA, however I always seem to understand you much better, and I sincerelly thank you for that
Susana,A sub-S corporation and an llc both flow through to personal income tax returns. A C corp. will pay tax on any profit not used to pay salaries. And dividends are taxed on the corporate and personal rate. To avoid the dealer issue I deal in my C corp. and set up llc's for each individual property (ex:123 ABC ST.
).
Hello MichaelChandler,
makes sense what you just explained, now you say to avoid the dealer issue, does that mean that you startegy with REi is mainly flipping and that's why you would be considered a "dealer" and not an investor????
If so, would may case be different since I would be buying mainly sub to and holding on to the property long term, or am I consider a dealer to???
And how is it that you actually avoid the " dealer issue" by operation through a C corp???
Sorry for being so slow with this subject, I know it's frustrating for those of you who undestand how this works
Quote:
On 2004-02-15 21:11, MichaelChandler wrote:
Susana,A sub-S corporation and an llc both flow through to personal income tax returns. A C corp. will pay tax on any profit not used to pay salaries. And dividends are taxed on the corporate and personal rate. To avoid the dealer issue I deal in my C corp. and set up llc's for each individual property (ex:123 ABC ST.
). <IMG SRC="images/forum/smilies/icon_wink.gif">
Quote:So in that case, if I choose to have the LLC treated as a corporation like you mention above and is not longer then consider a pass through entity, that mean good news people people like myself that are on the highest tax bracket in their personal tax return, right?? Maybe good news, but remember that the 15% tax rate on your federal tax return only applies to the first $50K in C-Corp profits. Between $50K and $75K, the federal tax rate is 25%; Between $75K and $100K, the federal tax rate is 34%; and, then 39% up to $335K.
You also have to factor in the 9.5% corporate tax rate MA charges at the state tax level, plus a tangible taxable property tax , and somehow you have to work in a 10.5% bank tax. Now I know why MA is nicknamed TAXachusetts.
Quote:Do I have a choice??? I mean I don't have to take a salary if I don't want to?No, you don't have to take a salary. If you choose not to, then a C-Corp may be a better business entity for you than an S-Corp in the short term.
Quote:Dave, that's what I am trying to find out, what's best. Now I know that if I leave it filled as a C corp then the profits earned will be tax at the lower rate of 15%, providing I don't have to take any salary out or pay social security that means I could still keep $34K roughly to re-invest and buy more properties with.The determination about which business entity is best for you should be a decision coordinated among you, your tax advisor, your financial planner, and your estate planner. There is no one size fits all answer here. The right business entity for one person may not be the best decision for someone else.
Quote:However if I elect to have the LLC treated as an S corp, how does my situation change???? Isn't an S corp considered a flow through entity??? In that case would the $40K be then taxed at our higher tax level, then what are the benefits if you are buying subject to and holding long term to have a S corp????
Again, this is a decision best made by you in coordination with your tax advisor, your financial planner, and your estate planner. For most, an S-Corp probably is the best entity for your flip properties, but is more restrictive on business writeoffs.
Quote:now you say to avoid the dealer issue, does that mean that you startegy with REi is mainly flipping and that's why you would be considered a "dealer" and not an investor????
If so, would may case be different since I would be buying mainly sub to and holding on to the property long term, or am I consider a dealer to???
And how is it that you actually avoid the " dealer issue" by operation through a C corp??? Your Subject To activities are also property flipping. Note that John Locke's exit strategy does not use a Lease/Option, but instead he teaches to sell on Contract For Deed.
Regardless or whether you are selling on Lease Option or Contract For Deed, your activities are dealer dispositions in my opinion. There is no stigma to being a dealer to real estate. Dealer status is only an issue for those who hold some long term rental property AND engage in dealer dispositions. If you conduct both activities, then you risk having your dealer disposition taint your rental property sales. To prevent the IRS from lumping your rental property sales in with your dealer dispositions, you want to conduct your rental property activity in a business entity that is separate from your dealer activity. Property that is sold in a dealer disposition (1) can not be used in a 1031 exchange, (2) can not take installment sale tax treatment, (3) is not eligible for capital gains tax treatment, and, (4) has all profit on the deal fully taxable in the year of sale.
Dave,
you are so right with the Taxachussettss comment
I think you have given me great information, I was not thinking that using Sub to will mean being considered a dealer. However I think fo right now as long as I use a trust and an LLC to protect identity and assets, I should be ok with my first 2 properties and then it is probably time to have my CPA advise if we should use another entity for tax purposes since we fall in such a high tax bracket with my husbands income.
Lot's of great information in this post.
Thanks so much to all that posted!
Best,
Susana
DaveT, I'm interested as you why your opinion is that lease-options should be characterized as dealer property. I've been under the impression that a true lease-option (not a lease-purchase) where the tenant-buyer is given a few years to exercise the option, and may very well not exercise, can be considered an investment property.
Of course, there are a lot of RE gurus out there (though admittedly they're trying to sell a course that espouses this approach) that suggest the lease-option as an approach which doesn't throw you into dealer land.
Are there things you would suggest that can be done to better protect one from not having lease-options be considered dealer property? Would a 2-3 year option period be better than a shorter one for example?
Also, would you then suggest to hold the long term keepers in a separate entity from those properties that you might only hold for 2-5-8 years due to someone exercising an option?
DaveT
The interesting question is why Subchapter S corporation instead of LLC?
I think that was the part of the main question (?) so in my opinion, dealing as LLC or limited partnership with identical corporate umbrella and tax system is just simpler and easier for bookkeeping, percentage of the ownership selling, etc.
Each individual property should be kept in separate trust owned by LLC (or S-Corp) and the elected trustee can be another LLC or S- Corp that is in fact owned by you but without your name being on the ownership displaying paperwork for the purpose of saving a half a percent to a percent usual trustee fee.
All additional comments and constructive arguments are welcome since this tend to be a never ending dilemma! [ Edited by omega1 on Date 02/18/2004 ]
Quote:The interesting question is why Subchapter S corporation instead of LLC?
I think that was the part of the main question (?) so in my opinion, dealing as LLC or limited partnership with identical corporate umbrella and tax system is just simpler and easier for bookkeeping, percentage of the ownership selling, etc.omega1,
An LLC can elect to be treated for tax purposes as a partnership, as a corporation, or as a disregarded entity. Since Susana made no mention of partners, her options appear to be limited to disregarded entity or corporation.
In the original question Susana has already decided to have her LLC treated as a corporation. Her question was limited to which is better for her -- an S or a C corp.
While I stated as a generality that an S-Corp suits most investors purposes when engaged in property flipping, my specific response was that this decision needs to be made in coordination with her personal advisors who can help make the determination based upon their knowledge of her income, financial strength, other assets owned, her asset protection need, requirements for corporate business writeoffs, and her potential tax liability for her expected level of business income.
Again, there is no single correct answer to this question for everyone. For example, if Susana wants to offset her corporate income with corporate expenses for health insurance and for a corporate "keyman" life insurance policy, then she would choose a C-Corp as these deductions are not available to her in an S-Corp. If these are not issues for Susana, then an S-Corp avoids double taxation of income issues inherent in a C-Corp.
Quote:DaveT, I'm interested as you why your opinion is that lease-options should be characterized as dealer property. Erick,
My comment needs to be considered in its full context. Of course, not all lease options are dealer dispositions. Instead, I maintain that when you are engaged in a property flipping business, a lease option exit strategy does not necessarily void the dealer disposition nature of the transaction. If you go into longer terms for your lease options (5 years, 8 years, etc), then you increase the probability that the IRS will recharacterize your transaction as a disguised sale -- putting you squarely into a dealer activity.
DaveT,
The reason I mentioned S-Corporation is because that formation is better suited for smaller companies with no more then 70 investors. If you are one man show, you are probably looking for those tree things to begin with:
1) Corporate umbrella
2) Transparent, single taxation
3) Ease of management
With that in mind I am prone to believe that LLC gives you the same options but easier way to deal with paperwork such as minutes of corporation, sell of stack in case of equity and debt financing, etc. What is your opinion on that?
The finer distinctions behind your question is probably better answered by corporate attornies and corporate tax accountants.
It is my understanding that an LLC is one of the following for tax purposes:A partnership,
A corporation, or,
A disregarded entity.If you elect to have your LLC treated as a corporation, then you must make a further election to be treated as an S-Corp, otherwise the default is C-Corp. I don't see the distinction between an S-Corp and the LLC treated as an S-Corp. They still file the same tax returns, don't they?