Inc or LLC as the management company for long term real estate?

Question

Hello everyone,

what's your take on creating an Inc (S-corp) as the management company for long term real estate and having separate passthrough LLC's for the actual properties that your buying ?

(or should the management company be an LLC as well in this case)

Bryan O. · Answer

@Bony Mathew this is definitely a CPA question. I would not necessarily take @Gerald Demers belief on single member LLCs completely to heart. Each state treats that issue differently and some provide full protection while others provide more limited protection. See this article for an overview.

Typically, the LLC is the preferred vehicle for holding the assets. Management can be done however you like, but it often recommended to use another entity because it separates passive from active income, plus reduced liability from management (i.e. lawsuits for E&O type stuff). Depending on your situation it may be smarter to do a Corp or LLC, that's the part where you want your CPA.

Best of luck and happy investing.

Gerald Demers · Answer

Exactly @Gita Faust.  In fact, if I was to ever open Quickbooks in anything other than READ ONLY mode, I think it would cost me my life!  Which is fine by me.   :O)

Gita Faust · Answer

@Gerald Demers You are a true CFO :)

That is what I tell everyone - do what you are good at and enjoy every minute!

Stan Sugarman · Answer

I use a corporation personally for our management company due to the management fees being treated as active income by the IRS. There are certain tax benefits for a corporation compared to an LLC for active income.

Gerald Demers · Answer

Thanks @Gita Faust.  But who are we kidding; I don't ever open the software; I just look at the reports.  My partner does all the books and admin, I source new deals and talk to private lenders.  We each do what we are best at (as it should be).  :0)

Gerald Demers

Gita Faust · Answer

@Gerald Demers If you use QuickBooks Accountant version - you can open the software twice and you will be able to view two files at one time.

Bryan O. · Answer

@Gerald Demers so you're saying you not only have to create a business, but run it like a business too?!?! Say it ain't so!  ;)

You are right. If you don't keep things separate from your personal life a judge can simply rule that it is a sole proprietorship based on the way you operate the company. Not a good spot to be in.

Gerald Demers · Answer

@Bryan Otteson, we were told about married couples still being regarded as a single member llc from an education session with Aaron Laughlin, Laughlin Associates.  I do not know if that is a general rule or if it's dependent on how you file you taxes (filing jointly or as individuals).

Thank you for the link to that article.  It was a good read.  I really hate articles that don't have a date; you never know when it was written.

Like the article, Aaron spent more time emphasizing how easy it is to have your corporate veil pierced, single member or not.  Most don't have proper books and formal documentation (minutes, resolutions, etc).  Or, they pay for a business expense with their personal credit card and then simply transfer funds from the business account to their personal account to pay them back, no expense report.

Owing a business is a must, but you have to be prepared to maintain it and not just the business it owns or trouble can easily find you.

Gerald Demers

Gerald Demers · Answer

@Bony Mathew, you need to speak to a CPA that focuses on investment real estate because the answer to 99% of your questions are going to be "depends."  I AM NOT A CPA OR ATTORNEY...but I stayed at a Holiday Inn before.

Is is just you in the business, you and your wife, you and another partner?

Learned something new over the weekend about the dangers of single member LLCs.   I also learned that many people think they are safe by creating an LLC with husband and wife owning 50% each.  But we learned that the IRS still considers that a single member llc.  From a legal perspective, a single member LLC is the same as a sole proprietorship meaning in a law suit, you could be exposing your personal assets to that lawsuit.  Talk about seeing a lot of people squirm in their seats.

I can tell you what we do.

We, two unmarried managing members, have MapleStar Real Estate Investments, LLC and Brooks Young Financial Group as primary LLCs and companies for flipping real estate and notes (S-corps, great to pay salaries, have employees, set up retirement and medical accounts).  However, the IRS considers everything as inventory regardless how long you own it so you can't depreciate property.

Then we added MapleStar Property Management LLC for our rental portfolio (LLC as a partnership - depreciation allowed and all other real estate deductions).  CPA set up the chart of accounts specific to this company which functions differently.  In Quickbooks, you can switch between each company, having only one open at a time.

There are a few ways that you conveniently move excess funds from the management company to your general LLC.  Talk to a good CPA.

PS:  Make sure your CPA knows real estate investing.  I have seen a few that are great CPAs to help you run many types of businesses but know little of real estate investing and end up missing a bunch of tax advantages.

Gerald Demers

Inc or LLC as the management company for long term real estate?

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