LLC versus S Corp?

Question

Hey everyone,

I'm a newbie living in upstate New York; I visited an accountant today to talk tax strategy. When I mentioned forming an LLC for asset segregation and protection, he said that an S Corp would be the way to go. We had a lot to discuss in limited time, so I didn't press it, but I'm really curious. Has anyone done a pro/con list for forming an S Corp versus an LLC for a real estate buy-and-hold long-term tenant rental business? Any insights as to whether an investor might choose one over the other would be most appreciated!

Thank you!

- Heather

Josh Young · Answer

@Heather Johnston I personally don't put any of my properties in LLC's or S Corp, I simply own them in my name with my wife and we have insurance. The main reason people put properties into an entity is they think it provides asset protection, but in most cases it does not and you can still be sued and they can "pierce the corporate veil", so you get no protection. The main reason I don't put my properties in an entity is because it makes financing a lot more expensive, the entities themselves also cost money to maintain, but financing is the main reason. An entity cannot get a conventional loan, and if you buy the property and then quit claim deed it into the entity you risk the loan being called due because of the due on sale clause, this probably won't happen, but I view it as just as likely as the entity providing asset protection.

Before I owned my first rental property I was concerned about what type of entity to start as well and I found that the answer is none. Just buy insurance and don't be reckless or negligent.

Before I owned my first rental property I was concerned about what type of entity to start as well and I found that the answer is none. Just buy insurance and don't be reckless or negligent.

Max Guerrero · Answer

Thanks for the links Account Closed

Account Closed · Answer

I'm not a CPA but I did sleep in a Holiday Inn once. (old commercial)Anyway, 1. you don't put single family real estate in an S corp. Get a different CPA.2. An LLC doesn't give you the protection you may think it does. But Universal Insurance Coverage does.

3. And read these:

Here's a post I did on LLCs that may help

DO You Need An LLC - It Gives Me Protection, Right? My Attorney / CPA Says That. . .

https://www.biggerpockets.com/forums/311/topics/1098136-do-you-need-an-llc-it-gives-me-protection-right-my-attorney-cpa-says-that

All my REIs are in an LLC! Why am I being personally sued?

https://www.biggerpockets.com/forums/926/topics/1097903-all-my-reis-are-in-an-llc-why-am-i-being-personally-sued

I suggest an LLCs to be used to open a bank account and run all related income & expenses through it to avoid the accusation of commingling funds, to be able to write checks and to send and receive wire transfers. The IRS will appreciate it when they audit you.

Bob Stevens · Answer

You need to surround yourself with a team, (NO your agent is not part of your team) and not waste time and money flying around. I have seen dozens and dozens of investors from around the world buying properties in cities they have never been to. Also never using an inspector, waste of $500. Heck, I live on the beach in FL and buy /sell properties on a regular basis in my market, OOS  its all about your team and knowledge.

All the best

Joseph Palmiero · Answer

Account Closed is correct.  Using a S-corp for buy and hold real estate in most cases is not the best choice.  A S-corp may be a good option for certain real estate activities such as flipping.

Account Closed · Answer

Heheh - did you actually READ what I wrote? I don’t think so. First, as wild and outrageous as it may seem, I don't write this just for you, I'm writing for the thousands of lurkers who never post a sentence but, learn from conversations like this.

And, How did you come up with a "reluctant vote"? I use LLCs.

I simply said it doesn't offer the protection you think it might. (No matter what you’ve been told) Hence, my suggestion is to read the links I provided. Anybody else reading this, if nothing else, read the links I provided, save yourself some grief. ;-)

I perceive you are a "black and white" individual. Which is fine. Things need to be this way or that way, nothing inbetween. Real estate has a lot of grays in it and each investor does things differently. Here is something to read on S Corps and real estate, and then "do it your way". ;-)

Should You Set Up an S Corporation for Your Real Estate Investment?

https://www.jmco.com/articles/real-estate/s-corporation-for-...

Your Comment "my CPA literally told me I could set up and maintain the S Corp or LLC myself" which is true, and I can think of a couple of reasons he'd rather you do it, than him. The one question I always ask, if you do it on your own, "are you prepared to defend it in court to the judge"?

Andrew Syrios · Answer

Here's a good rundown of the advantages/disadvantages of both: https://www.biggerpockets.com/blog/s-corp-vs-series-llc

Personally, I think an LLC makes much more sense and that's what the large majority of real estate investors use.

Bob Stevens · Answer

In all 500 or so of my flips/sales, I have never gotten an inspection, My guys know what to look for. ALL you need to do is connect with those that are doing deals. Allow them to handle for you

All the best

Luis Alvarez · Answer

Hi @Heather Johnston, fellow J.D. I presume?? 🙂

What hasn't been mentioned or clarified is that the real question should be was your CPA referring to an LLC treated as an S-Corp (solely for tax purposes) or a traditionally set up Corporation (and then distinguished as an S-Corp).  Yes, an LLC can be treated as an S-Corp for tax purposes, while still have the flexibility of allowing much easier transfers and assignments of interests versus a traditional corporation which is owned by stock shares (and gets complex, if you remember Business Associations from your Bar Exam)

The pros/cons list of electing to have an LLc treated as an S-Corp is thorough, but basically, there's a certain "break-even" point where it makes sense to have the S-Corp treatment because the tax advantages outweigh the extra protocols that come with an S-Corp.  There are at least 10 additional tax advantages that I utilize for my holding LLC (treated as an S-Corp) which are not available to LLCs treated as either disregarded entities or partnerships for tax purposes).  And while some have touched on it on here, you typically would not want to have the direct title of real property in an LLC treated as an S-Corp.  However, an LLC (treated as an S-Corp) can certainly hold interests of underlying LLCs that in turn hold the direct interests of real property.

Financing can be difficult when property is held in an LLC, but a simple Grant Deed out of the LLC and then back to it (post financing) would be an easy work around. And no, the due on sale clause does not apply to such transfers. There is codified and case law exempting a majority of the transfer scenarios which most investors out there are worried about.

LLC versus S Corp?

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