First Time Flipper - LLC or S-Corp business ?

Question

Just starting to get my feet with in flipping. Prior to getting under contract, is a LLC or S-Corp a better business plan for flipping? Would it be same for rental properties?

David Ginn · Answer

@Tyler OlsonHi Tyler,The short answer is, I prefer an LLC. Here are some things to consider when making this decision:Asset protection is important to building wealth. The wealthy do not own assets (houses, cars, even LLCs), they CONTROL them. I have been through one of the worst down cycles in history. It was through that down cycle that asset protection became abundantly clear. One of the many things I learned is that single asset LLCs are critical for the survival and continuance of wealth. Look at it this way- If you put all of your homes or assets into one entity and someone sues you, what can they get? Everything that’s in that entity. On the other hand, if each property were held in its own entity, then the person suing you can only go after the profits in that LLC. If they can pierce the corporate veil.In regards to your question about a Scrop: There are two main ways a Scrop can be set up. One is to set up an actual s-corporation. This has more maintenance and requirements. The second, and better, the option is to set up an LLC and then take an S-Election. This is an LLC designation. The reason I prefer this option is that the LLC is less strict on its maintenance and requirements. As a side note, this entity must be a member manager-managed by you or your wife.To be frank, you actually should have both a Scorp and an LLC with an S-Election. The Scorp should be set up to run your renovation company. It should not hold any major assets and its primary use is\should be to pay you payroll and dividends. This reduces your tax liability. This renovation Scorp can act as a shield to protect your assets or homes that are held in your single asset LLCs. In contrast, the LLC with S-Election should be used to hold a property and is a single-asset LLC.As a disclosure, I am not an attorney or an accountant. I have had on staff attorneys and accountants who help me set up asset protection. Please seek their advice. This is a subject I know extremely well because it is what helped me through the last down cycle. In the near future, I may record a video of a more in-depth discussion on this topic.I wish you the best.Remember flipping has its risks.You need to buy rightYou need to negotiate the deal right.You need to get proper funding in place.You need to renovate right.You need to sell right.If you miss in any of these areas, you can lose money.Thanks and see you around,

Allen Arden · Answer

Great @David Ginn

Natalie Kolodij · Answer

....An S corp can definitely have more than 1 member.

Many S corps are an LLC (with 1 or more members) with an S election added.

If down the road he's making $100k on flips he will likely want that S election.

Nicholas Aiola · Answer

@Tyler Olson You have to speak with a tax professional to get an accurate answer on how to structure the entity used for flips. Rentals are easier - 99.99% of the time you should avoid corporations (C or S).

However, profits from flips are subject to self-employment tax in addition to ordinary income tax.

Depending on your situation, an S Corp could benefit you but you have to weigh the costs (separate tax filings, payroll costs, possible reduction or loss of Sec. 199A deduction, possible higher annual fees/taxes, etc.) vs. the benefit (avoidance of self-employment taxes on a portion of your profits).

My advice would be to consult with a tax professional and attorney first to ensure you're setting yourself up correctly from the beginning. Otherwise, it could be more costly to redo everything in the future.

Ned Carey · Answer

@Tyler Olson I see some conflicting or incomplete answers here. @Natalie Kolodij got it right, which is to be expected since she is an accountant.

I will add to her answer to help clarify. An LLC can choose to be taxed as a pass through entity or as a corporation. If it elects to be taxed as a corporation it can elect to be taxed as an S Corp.  (C corp is very bad way to hold real estate tax wise)

An S Corp can save you on Social security. Flipping is earned income. It is taxed as ordinary income and subject to social security tax. By electing to be taxed as an S Corp you can receive some of your income as earned income and some as dividends. The part that is dividends is not subject to social security.

Rental income is not subject to SS so there is no advantage to holding rentals in an entity taxed as an S Corp.

Now an S corp is a corporation and requires more formalities. An LLC that elects to be taxed as an S corp is still and LLC and is more flexible and easier to run.

I am not an accountant or attorney. The above is my laypersons understanding of the laws. It is not intended as advice for your specific situation and may include errors. It is intended as general information to help you deal more effectively with your tax accounting or legal professional.

Nicholas Aiola · Answer

@Tyler Olson @Bob Floss II

An S Corp can have up to 100 shareholders but there is more flexibility with a partnership. For example, S Corps require their shareholders to be paid a salary and receive equal profit distributions.

Partnerships do not have a salary requirement for the partners and allow the partners to structure capital, profit/loss, and distributions however they want.

Bob Floss II · Answer

@Tyler Olson Aside from getting tax advice, take into consideration an S Corp only has one member, versus an LLC that can have multiple members. If you want to take on partners down the line, you'll want an LLC.

David M. · Answer

@Tyler Olson

Generally go with a single member LLC.  For flips a S Corp might be useful since flip income is active income subject to self employment taxes and taxed as your regular income rate. You’d have to be doing a fair amount to take advantage of the S Corp structure and additional overhead costs.

Rentals definitely single member LLC because the income is passive.  This assumes you use a LLC instead of your personal name

If anything, keep your long term rentals and your short term flips separate

Ujwal Velagapudi · Answer

If it is just yourself, a single member LLC makes sense for most people. Your net income (or loss) will be a pass through to your personal taxes. Whereas in an S corp it is more so if for an active business in my opinion, where you will draw a salary, and the remaining profits will be distributed to all of the owners. I've used both, but it just comes down to different tax reasons, partners, types of businesses, etc.

First Time Flipper - LLC or S-Corp business ?

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