S Corp or Partnership LLC

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S Corp or Partnership LLC

Troy Williams
Rental Property Investor · Florida & Shanghai · Member since 2017 · 192 posts · 68 votes

My partner/rock in roll sista @Colette Chase and I bought two properties this year and wondering how to best setup our company structure for best liability protection, tax benefits, etc. We just registered an LLC in the same state as our properties.

As I understood from a conversation I had with a CPA this morning, UNDER the LLC structure, if the company has more than 1 partner, you can opt for Partnership LLC or S Corp.

As an S Corp under the LLC, you can choose to declare whatever amount you want as self-employment tax, where as the Partnership LLC, requires all partners to pay full self-employment based on your shares of the company. For example:

  • A property under my SCorp LLC (with two partners 50/50 ownership) that made 10K total profit (after deductions, depreciation, expenses, etc) would allow me and my partner to only pay 1k (any amount for that matter) each of self-employment tax if we wanted to, leaving 8k untaxed (by self-employment tax) in the company account.
  • A property under my Partnership LLC (with two partners 50/50 ownership) that made 10K total profit (after deductions, depreciation, expenses, etc) would require that each of us pay 5k self-employment tax. No choice.

Can anyone else confirm this or give feedback on best practices?

Also, in example above, the 10k still gets taxed as income no matter what or does either structure allow flexibility there also?  We are also trying to work out what's the best balance of managing our taxes so that we have "zero" income vs. taking the income to increase our income/debt ratio.

I'm sure this has been discussed before, but having trouble to find specific answers.  

Much appreciated to anyone that can contribute!

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Justin Freeman
Accountant · Brewer, ME · Member since 2018 · 31 posts · 39 votes
8y

Hi All,

The answer is, it depends what you're doing with the property. A flipping entity, I almost exclusively choose an S-Corp as it allows you to control self employment income in a reasonable manner. If the entity is used to purchase and hold real estate long term as a rental, as long as the rental remains just that, a rental, I normally go the Partnership LLC route as income from rentals is NOT subject to self-employment tax and the LLC is generally an easier vehicle to work with than an S-Corp. There's other factors, but from a tax side those are generally my biggest concerns.

Justin Freeman, CPA

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  • Krystin Krebs
    Interior Decorator · San Diego, CA · Member since 2018 · 7 posts · 4 votes
    8y

    Hi Troy, I don't have a good answer for you on this one, I actually stumbled upon your post because I was looking for similar information- only I am starting a partnership LLC in a flipping business- so if you don't mind, I'd like to piggy-back your questions with one of my own- would an S-corp make more sense, or a partnership LLC in a flipping business when it comes to self-protection? Hopefully someone with more experience in this could help us out- best of luck.

    0Reply
  • Jay Metzger
    Shelbyville, KY · Member since 2018 · 1 post · 1 vote
    8y

    I'm interested in the answer to @Troy Williams question as well. I'm in the beginning stages of setting up a very similar structure. My CPA suggested the Partnership LLC route, but the tax example mentioned above has me questioning that now.

    1Reply
  • Justin Freeman
    Accountant · Brewer, ME · Member since 2018 · 31 posts · 39 votes
    8y

    Hi All,

    The answer is, it depends what you're doing with the property. A flipping entity, I almost exclusively choose an S-Corp as it allows you to control self employment income in a reasonable manner. If the entity is used to purchase and hold real estate long term as a rental, as long as the rental remains just that, a rental, I normally go the Partnership LLC route as income from rentals is NOT subject to self-employment tax and the LLC is generally an easier vehicle to work with than an S-Corp. There's other factors, but from a tax side those are generally my biggest concerns.

    Justin Freeman, CPA

    3Reply
  • Nicholas AiolaBusiness Member
    CPA & Investor · New York, NY · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    @Troy Williams There's really no one-size-fits-all structure; a lot of factors have to be considered when structuring entities, which is why it's very important to have a real-estate-savvy CPA and attorney on your team.

    That said, I'd like to address a few points:

    • You can elect to be taxed as an S Corp even if you are the sole member of an LLC.
    • Under the S Corp structure, you cannot declare "whatever you want" as self-employment income subject to SE tax. Yes, there is an opportunity to mitigate some of the SE tax, but it is not as simple as saying "I only want to pay this amount". Shareholders of an S Corp are required to draw a "reasonable amount" of salary. There's no formula to compute what's considered reasonable; it's a culmination of different factors.
    • Entity structure also depends on your strategy. If you're holding onto your properties and renting them out, self-employment income/tax is a moot point - rental real estate is passive in nature and not subject to SE tax.

    Again, an analysis of your specific situation would have to be done to make an explicit recommendation but, hopefully, this cleared up some confusion on the general topic.

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  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    8y

    @Nicholas Aiola I know you can't give specifics, but generally speaking. We (my son and I) are real estate developer/builders that are the GC on jobs too, that buy property, develop and sell. If you had such a set up, would you choose to be an LLC or an S Corp and why? We've always had an LLC, but have been reading information lately that makes me wonder if that's the best route.

    I understand I need to seek the advice of a CPA or Attorney in my state for specific information and your answer is based on a hypothetical question substituting yourself, and not advice for me specifically.

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  • Nicholas AiolaBusiness Member
    CPA & Investor · New York, NY · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    @Karen Margrave It depends on my status (dealer or non-dealer), qualification (real estate professional? not a real estate professional?), other investments (do I have passive income, as well, providing me with passive losses?), other income (do I have other earned income? does it exceed the Social Security wage base?), and need for the profits (do I need to pull out the profits to live? will I use it for future deals?).

    Assuming dealer status, that means I have SE income to think about. If I have other earned income that exceeds the SS wage base, however, I'm not too concerned about SE tax. That would likely eliminate the need for an S Corp. Assuming no passive losses, the real estate professional qualification isn't of much use (in this example). If that's my situation, an LLC doesn't sound like a bad structure but, if any of those facts above are incorrect, it could lead to a different answer.

    As you can see, there are too many unknowns to say for sure.

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  • Timothy Dumbleton
    Investor · New York City, NY · Member since 2016 · 1 post · 0 votes
    8y

    @Nicholas Aiola  Thank you for your comments.  Maybe you have thoughts on my situation?  I'm buying a 2 unit rental with my girlfriend in upstate NY.  We live in Manhattan and we both own or are partners in some other rentals as well as getting income from work (W-2).  I'm a real estate professional (developer, architect) and my girlfriend is a photographer as well as getting rental income from property she owns.  We are both maxed out on SS withholding and this is  an investment property which we will hold and we won't have any employees.   We will do a little renovation work and then rent a month or so later.  We don't have plans to flip - this is a buy and hold for the foreseeable future.

    I just set up the LLC and need to get an EIN and need to pick S-corp or Partnership. I set up the LLC to limit our liability if something were to ever happen at the property we don't want it to hit us personally.

    Thoughts on this situation?  We plan to repeat this so just looking for a regular process we can follow.  BTW - I'm glad to reciprocate if you even need advice about NYC DOB work which I do a lot of....

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  • Nicholas AiolaBusiness Member
    CPA & Investor · New York, NY · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    @Timothy Dumbleton Definitely double check with your CPA/attorney but, on the surface, I see no tax benefit to electing to be taxed as an S Corp. The LLC should be fine.

    Since you're a real estate professional, hopefully this rental will kick out some tax losses that you can use to offset other income.

    Thanks for offering your expertise with the NYC DOB! That will certainly prove to be helpful. I look forward to keeping in touch.

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