Trasfering Ownership from a C-corp to to an LLC

[Wilson Lee]

The USA is a litigation happy country.  I do my best to limit my exposure to this wild west style lawsuit culture we have.

I am starting to flip properties but, for the last few years I have purchased rentals to hold. I am holding them in a few LLCs that are pass through entity for taxes. My property holding LLCs are groped up and owned by one LLC which my spouse and I own in-turn. (holding company)

I am setting up a C-corp to filp out of. I want a C-corp to keep my schedule E cleaned up to be attractive to lenders, I want that extra w-2 income form the C-corp. I am isolating each deal inside of it's own LLC owned by my C-corp. After the flip is successful, I am dissolving the LLC to stop a 3rd party form coming back after the sale with some crazy lawsuit.

The problem/question I have is. Should a flip project turn in to a flop!, I want to hold it as a rental. Call it a plan 'B' exit strategy. However I don't want to hold a rental in a C-corp. Passive income don't mix well with C-corps. What is the best method to get that property out of my c-corp and into a flow through LLC? I want to avoid changing Title. Title change triggers reassessment by the tax office. It makes chain of title messy for title insurance. Many lenders don't like Title changing hands rapidly.

I never had a C-corp before so I don't know, Can i simply assign interest in the property holding LLC out of my C-corp and to my main holding company. Or is there other things to consider?

[Scott Smith]

Hey @Wilson Lee,

When you start dealing with both buy-and-holds as well as flips, I tend to work with the Series LLC. It allows for the formation of separate "child" series under the "parent" Series LLC, but the liability is still compartmentalized within the individual "child" series in case there are any legal issues. The benefit of the Series LLC is that the formation of each series is simple, since it is a private document that you can create from your computer at home - which sounds like it would make your life a bit easier. It has many benefits, but it also helps a lot because you only have to work with a single EIN and can use a single bank account with the correct bookkeeping to operate all your investments, to prevent commingling of your finances. Then you could also choose to use on Traditional LLC as an operating company, to separate the liability of your operations (contractors, property management, etc.) from your assets.

For which entity, whether Series LLC or C-Corp, will fit your portfolio best, you need to talk to your CPA.

Some generalized comments on the topic, though. LLCs are better for asset protection. A Key feature of the LLC is charging order protection. An attacker can only go after the LLC, not the owner personally. For C-corps and asset protection, if you own shares in a corporation and are sued personally (i.e. after a car wreck), a judgment creditor can reach your shares in the corporation. If you are the majority owner, the attacker would control your business by virtue of share control.

While you have access to a wide range of deductions and the ability to set up fringe benefits without taxation, the biggest tax disadvantage of C-Corporation is the “double-taxation” issue. Double-taxation can occur when a C-Corp has a profit at the end of the year that it would like to distribute to its shareholders. The C-Corp has paid taxes on the profit, but once it gets distributed to the shareholders, they also have to declare the dividends they receive on their personal tax returns at their own tax rate. LLCs can choose how to be taxed – either as a disregarded single member entity (where the tax reporting flows directly onto the sole owner’s personal return) or as a multiple member partnership. LLCs can also be taxed as an S-Corporation or C-Corporation.

Hope this helps. Since the Series LLC sounds like a new entity for you, I will include a link to an article that explains it a bit better: https://www.biggerpockets.com/renewsblog/the-tradi...

If you have more questions feel free to reach out to me!