LLC Partnership or Corporation structure

[Gurpy Ont]

Hello BP members,

We (two partners) are planning to purchase a cash flowing rental property under an LLC. From what I understand, LLC can be elected to be treated as

1. disregarded entity/partnership for pass through, or

2. corporation

If the intend is to paydown the loan with leftover cash after taxes, which of these two structures will be better. The property will be in GA.

[Ashish Acharya]

I would never operate as C-corp for Real Estate investing for various reason not discussed below. The main reason people elect S-crop in RE business is to avoid SE taxes( self-employment taxes) . When you flip property, the gain is treated as ordinary income so have to pay SE tax. However, rental income is passive income (unless you provide substantial service like cleaning or maid service, seen in ARIBNB activity) and you don’t have to pay SE tax on rental passive income, so electing S-corp for rental portfolio does no good. Also, see below:

• 1)If you intend to hold rental under S-corp for a long time, than you can elect S-corp. however if you do not, transferring asset from S-corp to partners for various reason is a taxable event. (You transfer property from Scorp to you, you don't receive any money, but you taxes might be thousands of dollar if there was substantial gain when you transfer.) Whereas in LLC, transferring asset is not taxable event, it just reduces partner's basis in the partnership.
• 2)If you elect S-corp, and if ever wanted to draw let's say $5000k from S-corp for personal use (vacation), you have to distribute the proportionate amount to all another partners of the S-corp too. Whereas in LLC, each partner can withdraw what they want and only his/her basis would be impacted.
• 3)In S-corp, you act as both employee and investor. So you cannot deduct any loss greater than your investment or basis in S-corp just like when you buy stocks in the public company, the max you can lose is your money you invested in stock. Where as in LLC there is no limitation because the business loss and gain is pass through. There are some exceptions.

If you ever decide to elect Scop:

If you elect S-crop, you don’t have to pay self-employment taxes on the Corp’s Net Income, but only after the reasonable salary to the employee (which will be you). So salary that you pay to you self is still subjected to Self-employment taxes any way. So,

a) If you make 20k through S-crop, you have to pay yourself a salary and it must be reasonable, so entire 20k might be your salary. Entire 20k is subject to SE tax. This election did no good and gives your exact same liability asLLC.

b) If you make 100k, you pay yourself, 50k. The first 50k is subject to SE tax, but remaining 50k is not. Thus, S-corp becomes more valuable once you start making more money.

Any advice contained in this post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.