Business Formation - LLC vs S-Corporation

[Skyler Holloway]

For two partners looking to BRRR into long-term business (5+ years) in Nevada, which option is best?

From what I can tell, LLC has lower annual fees, same liability protection, and a bit more flexibility during management. S-Corp has some extraneous benefits (issued shares, survivability, separate entity), and the option to be taxed pass-through or not (so, no benefit vs an LLC on taxation).

It also appears that we can convert from an LLC to a S-Corp in later years.

If the plan is to build a portfolio of properties over time without flipping (IE, not focusing on immediate income that would be subject to Social Security and Medicare Taxes), should we just start as an LLC? Or, am I missing a compelling reason why S-Corp makes more sense now.

Any input would be great! :-) 

[David M.]

@Skyler Holloway

First, do you realize you don’t necessarily need an entity for brrrr residential properties? In fact, it makes it more expensive, much more than the cost of filing for the entity for the asset protection? It’s on discussion threads on bp nearly daily...

But that wasnt your question...

Electing to be taxed as a S Corp (remember, S Corp isn’t a legal entity, it’s just a tax statu) is really designed for reducing your self employment income tax payments. S Corp requires that the members are paid a “commensurate salary.” Any profits above that salary you can take as a dividend which is not subject to self employment taxes.

However, profits from sale or rental of real property are not subject to self employment taxes. So, the S Corp provides no value here. S Corp is valuable when you have active income subject to SE taxes and you can classify yourself as doing a “low salary” position .

I think as you have surmised, the LLC (s Corp or not) does not provide any tax advantage. It's only for asset protection.

I hope that helps. Let me know if you want to here anything about why you don’t necessarily need (or should want) an entity for brrrr. Good luck

[Skyler Holloway]

Hm- thanks for the input @David M.. It sounds to me like S-Corp isn't a consideration in your mind, but instead the decision point is between an LLC or none at all. Here's my reasoning for an LLC;

1. Asset Protection. Both members have other investments we'd like to protect (especially the liability of having tenants in a litigious state). 

2. Division of Ownership. Since there are two of us, we'd like to have an entity to divide ownership (we both own a property or two separately as individuals). Further, Articles of Incorporation can serve as the legal agreement between us for how to handle unforeseen life events or circumstances. 

Thoughts?

[David M.]

@Skyler Holloway

Oh, my apologies.  You aren't the average people starting out in investment.  Also, I didn't read your bio -- too many people have empty bio's...  Again, sorry.

N.B. LLC's have Articles of Formation. Corporations have Articles of Incorporation.

In your situation where you have other assets to protect and have to work out your operating arrangement, it certainly makes sense to have a legal entity.  This has been posted about before (specificaillypoint #2) and I haven't seen a professional weigh in on anything "better."  I suppose you could do the personal purchase w/ loan and transfer just Title technique which everybody asks about...  I certainly don't like it, but it appears there is at least one way to do it while maintaining your corporate veil.

My layman's advice about doing the legal entity would be to consider each of you forming your own. You each have your own single member LLC's. Then, for each deal you form another LLC, in the state the property is located, with your single member LLC's as members. While this adds extra cost and complexity, it allows you to customize the Operating Agreement, not the Articles of Formation, if necessary, for example what if its not a 50/50 split? What if you want this one particular property to go to a loved one... Whatever.... Also, there is the off chance you could sell the entire LLC to another investor instead of the property (granted, not too often). Note, chances are your commercial financing will want just one property per LLC.

Anyway, the LLC owning LLCs' is just something to give you two a little more room to "maneuver" in the future. For better or worse, remember the single member LLC is a disregarded entity anyway. It just means its one more "hop" to move money into or out of your personal bank account for use.

Does that help at all???