Sole proprietor, LLC or Corporation?

Question

Looking for some input...I'm working on educating myself more when it comes to various tax benefits and trying to decide what would be the best route for me moving forward. Ideally I would like to have at least 1 LTR, 1 STR and then flip 1-2 houses a year. With that said I'm curious as to what would be the best business set up (sole, LLC or Corporation). I recently read a book that mentioned there being a lot of power and benefits of a personal corporation but I'm curious as to when a corporation is actually beneficial over the latter.

Philip Barr · Answer

What is often recommended is for investors to separate out their active and passive income-producing assets into separate structures. For example, having your passive long-term rentals in LLCs, one rental property per LLC, and each in an LLC set up in the state where the property is located. Each rental LLC would compartmentalize the liability of each property so that it doesn't affect you or your other properties. The rental LLCs would all be owned by a holding company, set up as an LLC in WY to provide protection against personal liability as well.

For the active side, we typically want a separate structure. As was mentioned by @Ashish Acharya you could have an S Corp as a base. I recommend having each flip property in its own LLC, to again isolate liability, owned by the entity taxed as an S Corp. Alternatively, a C Corp can work because it has more robust tax reimbursements and deductions for medical plans and the idea would be to bring money out through those versus a dividend that would result in double taxation. That way, the dreaded double taxation is actually avoided and you can pull out money with a lot of tax advantages and also grow the company and reinvest given that the corporate tax rate is only 21%.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Ashish Acharya · Answer

@Desiree Board For your mix of long-term rentals (LTRs), short-term rentals (STRs), and house flipping, an LLC is ideal for liability protection and pass-through taxation. Rentals generate passive income, so an S-Corp offers no added tax benefit. For house flipping, consider an LLC taxed as an S-Corp to reduce self-employment taxes by taking a reasonable salary and the rest as distributions. Avoid C-Corps, as they incur double taxation.

Use LLCs for rentals and consider an S-Corp election for flips if income justifies the additional complexity.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Stephen Nelson · Answer

This is off topic sort of, but in general, you do not want appreciating assets inside any corporation. So not a "real" corporation. And not an "S" corporation. And also not an LLC that's made an election to be treated as a ""C" or "S" corporation.

One problem is, you can't get the property out of the corporation without triggering gains if it's appreciated. Like, say in seven years you just want to simplify and dissolve the corp but keep the property. That dissolution will trigger gains if the real estate has appreciated.

The other problem with having an S or C corporation holding real estate is, that arrangement creates a mess if you die (or if your spouse dies.) Getting the property out of the S corporation without paying taxes is tricky. And easy to screw-up. For the record, the Section 1014 step-up in basis? It doesn't work well with S corporations or regular C corporations.

BTW CPA firms (mine included) love S corporations They're profitable returns to prepare. So, it's a great deal for the accountants. Just not the clients.

Basit Siddiqi · Answer

I normally advise that people start a business as a sole propeitor in their first year.If it is successful and something you want to continue, then have a conversation regarding entities.

Markus Shobe · Answer

I would start with a sole proprietorship first. Once I got a few more I would then start to look at an LLC.

Ben Trageser · Answer

It really depends on your bigger picture and also what you are hoping to accomplish in the future. From a tax perspective, sole proprietorship and LLC are more or less the same. LLC's main benefit is from a legal perspective. Feel free to reach out if you have any questions/to discuss further.

Sole proprietor, LLC or Corporation?

Sole proprietor, LLC or Corporation?

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