Corporation or LLC?

Question

Hi everyone! Now that I've decided on a business name do I apply for a corporation or an LLC? Are they one in the same? I've done some research, but I still don't really have a grasp on this. Any assistance would be greatly appreciated. Thanks in advance!

Curt Smith · Answer

The quick answer including tax implications:

- LLC single or multi-member classifed as a tax non-entity (default), where all transactions fall down onto your 1040.  Use this LLC for rentals where you have rental house depreciations, expenses and long term capitial gains.  Depreciation will cancel out W2 income to a point that varies (RE professional or not, your W2 income level).  It's prefered to setup a multi-member LLC. IE a husband and wife.  Single member LLCs are ok, but don't have nearly the liability protection as a multi-member.   A multi-member is treated as a partnership and thus pull all the property details off the 1040 and just a K-1 falls onto the investor's 1040, thus keeping details out of view of the IRS and scrutiny.

- LLC but classified as an S-Corp.  This is an election you make after setting up the LLC.  You need to file corp quarterly / annual taxes and a K-1 to your personal 1040.  Use this entity for short term capital gains (flips and wholesaling).   Ideally you'd never wholesale  or flip outside an S-corp so you can take better advantage of expenses and you can reduce your taxes via paying out of the S-corp w2 vs dividends and save on FICA and take more deductions than as a DBA.

IRS audit:  DBA/sole proprietorship are being audited at a high rate.  S-corps have a low rate of audit.

The above was a terse over view and needs to be corrected and clarified.  tnx.

Ned Carey · Answer

What is your business going to do?

There many threads here on the subject. I also recommend the Legal self help books by Nolo Press. They have books on both LLCs and Corporations and info on their website too.

In general use an LLC to hold properties, and S corp if you have earned income to reduce Self employment tax and avoid a C corp (C Corps have their place but not for a beginner. They are a terrible way to hold real estate)

Manikia Liburd · Answer

Thanks everyone for your feedback. It is all very informative.

Steven Hamilton II · Answer

Curt Smith,

A single member LLC should not provide less liability protection provided the proper procedures are followed.  You need to treat it as the separate business it is.  Separate books, do not commingle funds, insure it separately, keep a separate business bank account run payroll regularly. Make or don't make distributions regularly.

In the beginning sole proprietorship until you make money and then move up.

-Steven

Curt Smith · Answer

FYI I posted what I feel is an important question re S-corp vs income directly to your 1040, on Steven's thread he mentioned above.

So far this thread has not mentioned why a multi-member LLC offers superior liability protection over a single member.  And how to run an LLC so as to hold up in court.  I suspect BP has many threads already covering these 2 LLC issues.

Circling back:  If one is just wholesaling, there is little liability to worry about, so the issue is mainly tax advantages (thus maximizing spendable income).  As John said, no need to get fancy at first, just make the income.  When you have spare cash then hire an accountant to set up an LLC taxed as an S-corp if Steven's discussion bears this out to be the the best way to go...  :)

curt

Steven Hamilton II · Answer

Manikia Liburd,

Here is a thread in which I posted a DETAILED description of the taxation of LLCs.

http://www.biggerpockets.com/forums/12/topics/76052-simple-taxation-questions

The deductions are primarily the same; however, some of the employment tax and employee benefit deductions increase with the use of a separate entity.

-Steven

Mary B. · Answer

Your company can be a LLC as a single member with no business tax forms requirements(not including employment tax forms)and still have protection; your company can be an LLC taxed as a corporation (c-corp or s-corp) or your company can be an LLC taxed as a partnership(must have 2 members minimum).

Its every business owners tug of war to choose which entity type. Whatever you choose don't go it on your name alone as a sole proprietorship. As a sole prop years ago I wound up paying additional net privilege taxes, business privilege taxes and this was just to the city. Also if you decide to register in a state that you don't live in that state will likely want taxes in addition to your residing state. Many people are swayed towards NV & DE for certain business privileges so make sure its worth it to you. You'll have to research your state laws as well as some local business laws also. Find a good corporate / business attorney for best assistance towards a good result. Utilize your area bar to refer you and they often will provide you a voucher for the first 1/2hr of consultation.

Kudos,
Mary

John Jackson · Answer

I used to really pound that people get the LLC, but now...I've decided for those just starting,....
Get a dba, then when you are actually getting income, get the LLC asap.
The dba provides no liability protection though, but starting off...if you haven't even done a deal...just get the dba.

Manikia Liburd · Answer

Thanks for your reply. I want to do rentals, wholesaling, and lease options. I am certainly going to get the book you suggested.

Corporation or LLC?

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