Setting up your biz? LLC? Corp? Partnership?

Question

Hello! I'm new here and just starting my biz with my husband. Did you start an LLC, S Corp, C Corp, or Partnership? Our Accountant suggested that we do a partnership but I've read that a C Corp is best. We are going to buy houses with the BRRRR method and hold them. THANK YOU!

John Woodrich · Answer

Thanks @Jake Stuttgen for the mention.@Bonnie Donahue would need more information but generally an LLC is what you will want. You definitely do NOT want a C or S Corp.

Weston Couch · Answer

@Bonnie DonahueHi Bonnie, this is just from my experience. Most people I know in your situation use a Series LLC like Jake mentioned here. A partnership doesn't compartmentalize liability as effectively, and the requirements for a C-Corp tend to be too laborious to justify it for smaller outfits. Series LLC's also allow you to scale your protection for more properties in the future with much smaller additional cost than other approaches. If you're interested in knowing more details on those options, feel free to connect.

Jake S. · Answer

Hey @Bonnie Donahue! I cannot give this sort of advice, as such, I'd defer to another CPA but I personally use an LLC with my wife on most of our properties and businesses currently

Stephen Menke · Answer

This may depend on the state and if it is crossing state lines. As I don't know all your details and cannot fully advise, but I personally choose single member LLCs. This option streamlines many things down the road for me.With an LLC and just starting, be prepared to jump through a lot of hoops and to personally guarantee the loans with any lenders. Also, know that this is not necessarily a permanent decision. As you grow as an REI, you can make changes to your legal structure for a cost that will not seem as significant as it does in day 1.Regards,Stephen

Jordan Callaway · Answer

@Bonnie Donahue My opinion {which is in no way advice bc not CPA consult yours, But make sure they’re familiar with RE investing tax laws not just CPA without that specialty} is single LLC separate new for each property. If possible have president of LLC be a trust no one can crack C Corp may not allow cross asset accounting and could hurt and series could be dangerous... When/if shit hits the fan the banks & potential lawsuits could/have/will expose properties connected in series LLC even though they’re not supposed to be separated, or multiple properties inside of 1 LLC is more risky. All just my opinionWith that said, fees do come into play based on costs per state. For instance it wouldn’t make sense to have separate LLC for 5 $100,000 homes if setup cost and annual fees are $1,000 per building... In states with high fee it may make more sense to have a few properties in 1 LLC

Weston Couch · Answer

Account Closed Good point, but you can get around that restriction by simply buying the properties in your own name then putting them into land trust(which avoids due on sale issues) and then assigning those trusts to the individual cells of the Series. That said, I wouldn't use a Series at all in CA in order to avoid the $800 franchise tax there, but the structure would still be similar and you could still buy the properties personally. What do you use?

Zachary Bohn · Answer

Account Closed Are you a CA resident? S-Corp income passes through to the owner's personal return and you would still be subject to CA tax on income produced in Indaina.

Account Closed · Answer

You are correct Zach, my business partner and I pay CA income tax on the earnings that pass through the S-Corp. The corporation, however, only pays indiana state taxes.

Account Closed · Answer

@Weston Couch that's an interesting way to sidestep the due on sale issues, thanks for that!I don't bother with incorporating in CA, just file out of state and get a cert of foreign status. I have two different businesses- one for property sales which is an S Corp filed in Indiana. In order to only pay Indiana state income tax and not CA, we were going to create an administrative management company to operate it in CA that would handle our CA employees/office/ marketing operations, etc... but it looks like there were some changes to nexus laws that focus on point of sale to source the business. Since all of our sales are actually in Indiana, we've been advised that we're ok to just run an Indiana S corp for our sales business.For rental properties held, it's just simple Indiana LLC's (one for my personal holdings, another for business holdings split between my partner and I). Since we hold relatively little compared to our # of unit sales, one LLC for each business & personal seems to cover us well enough considering the assets are smaller multifamily.

Account Closed · Answer

@Weston Couch side note, I've seen investors use the series LLC for rentals with smaller portfolios. I find the additional protection excessive if you own, let's say 5 duplexes all with liability insurance policies on them. The drawback I've witnessed personally is that commercial lenders, which would be the buyers only option if the buying entity is an LLC, have gotten hung up on funding series LLC's for smaller investors. Not sure why, just observation.