Advantages of an LLC vs. S-Corp?

Question

I always see discussions where investors ask about creating an LLC for their business.

How come people never discuss S-Corps? Are they not common in the World of REI?

I currently own several S-Corps in other industries so I'm familiar with the structure of them, the requirements for them in my state, the tax benefits of them, etc.

Is there a downside to starting a new S-Corp to run all of my real estate investment endeavors through? Why are LLC's always suggested and that much more common?

Thank you in advance!

Brandon Sturgill · Answer

@Brian G. LLC is superior for RE because you separate yourself from the property: i.e. no personal liability...but an S-Corp allows access to your personal assets...bad idea...if you like the structure of an S-Corp, you can have your LLC taxed as an S-Corp...they are pretty diverse...typically more affordable as well.

Edward B. · Answer

@Brian G.,

Another reason that I have heard to keep your flipping business and rental business in separate entities is to make it abundantly clear to the IRS that they are indeed separate. If you sell a rental, you do not want it to be treated as a flip for tax purposes. If the IRS questions you on that you have already lost...even if you ultimately win. Trust me, fighting the IRS is an agonizing and excruciating process, even when you are 100% right. So anything you can do to prevent them from questioning your claims is worthwhile in my opinion.

Edward P. · Answer

Well written @Brandon Sturgill

Brandon Sturgill · Answer

Flips may be different...how many are you doing...this may be taxed as ordinary income...then you would have to weigh you options for best tax shelters...and then consider limited risk through a builders risk insurance policy or similar...on the buy and hold side, I use a "parent" LLC to register individual LLC's for each property...Ohio LLC's are only $99 right now, so it's really affordable. You may get varying opinions as to what type of structure should be used to register the LLC's...

@Brian G.

Brandon Sturgill · Answer

Hey @Edward P. How are things in L.A....haven't been out that way for a while...was looking forward to getting back to Big Sur, but it looks like the storms really tore up some parts of Cali...

Brian Garrett · Answer

@Edward B. Makes sense thanks for your insight.

Brian Garrett · Answer

@Gina Baker @Brandon Sturgill @Jeffrey Bibby Thanks for helping clarify this. For someone who is planning to do both flips and rentals do you suggest having separate LLC's for each strategy?

Jeffrey Bibby · Answer

Active income through an LLC taxed as an S-Corp is best because as long as you take reasonable compensation through payroll the remainder of the profit can be taken as distribution which relieves you of the 15.3% FICA/Medicare Tax. Your passive income should be run through an LLC taxed as a partnership or if SMLLC on your Sched E of your personal return as no reasonable compensation is needed and all income will run passive with no FICA/Medicare tax at all.

Brandon Sturgill · Answer

@Brian G. Oh, and talk to your CPA and Lawyer :)

Gina Baker · Answer

@Brian G., if you haven't listened to this podcast, it might offer you some insight: https://www.biggerpockets.com/renewsblog/bp-podcas...

Advantages of an LLC vs. S-Corp?

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