S Corp or Partnership LLC

[Troy Williams]

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!

[Justin Freeman]

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