LLC Classification: Partnership, Corporation, or S Corporation?

Question

Hi,

I would like to get your thoughts on this. I recently created an LLC to own my future real estate properties and I also just applied for an EIN. What is the best classification for an LLC which purpose is to own real estate: Partnership, Corporation, or S Corporation? Please also let me know your reasons.

Thanks!

Steven Hamilton II · Answer

Yuliany,

These gentlemen are spot on with their answers.

If you are a single member LLC, you will not want to elect any kind of entity. This will cause you to file Schedule E on your tax return.

If you are a Multi-member LLC, you will want to file the return as a partnership(Form 1065).

If you flip/wholesale properties, you will want to elect S-corp status and pay yourself a reasonable salary.

Some people if they are in a high tax bracket, will use a C-corp to hold their properties in order to acquire financing separate from their name and to shelter some of the income from tax if they are not taking any dividends for an extended period of time.

-Steven the Tax Guy

Bryan Hancock · Answer

See Bill's comments above.

You may also consider a series LLC.  You could put each rental in a separate series.  That may prove expensive if you intend to hold the property in California because I believe they want franchise taxes or some taxes for each series.

Bill Walston · Answer

That's correct.  That being said, I tend to agree with Bill Gulley about the "one property - one LLC" theory.  I think the costs WAY outweigh the benefits.  I look instead at the amount of EQUITY in the LLC.

In your case, I'd suggest having your properties in one LLC and purchase a good liability policy.

And just a note, NY is not one of the 10 states that allow the formation of a series LLC.

Hope this helps :)

Bill Walston · Answer

Byran is spot on.  Other things being equal, if your business generates earned income (as with rehabs or wholesaling) you most likely would elect S-Corporate status.  On the other hand, if your niche is rental properties (passive income) then you would opt for the partnership election if you are a MM-LLC.  I rarely, if ever, recommend the C-Corporation election for owning real estate.

Steven Hamilton II · Answer

@Amy Solomon ,

Sounds to me like the accountant wasn't looking out for you or advising you or you didn't know what to ask.

Depending upon your situation, it is possible using the accrual method of accounting may have been a bigger benefit to you in order to be sure that you matched income and expenses at the same time as opposed to the cash method which you see income when you receive and expenses when you pay them.

With the Cash method if you have a profit as of December 31st of 100k you will pay taxes on that 100k. With the accrual method if you have expenses relating to that payment of 100k on December 31st and your expenses will be incurred in January, you will match them together.

Bryan Hancock · Answer

It really depends on what you are hoping to use the LLC for.  Will this be for flips, rentals, hard money loans, etc.?  What is the purpose?

Steven Hamilton II · Answer

John Mireles,

I agree with you. I'm lucky. I'm in Illinois and the Series LLC can be great.

The cost for you may be much better put into liability insurance and such.

As Bill Walston is on par with my understanding. The state of NY will recognize EACH LLC as just that singular LLCs. Each of which would have to register with the State of NY.

Bill Gulley,

The accounting and extra work is not that siginifican't for multiple LLCs.  Do you keep separate bank accounts for each property?  I do both for LLC purposes and for record keeping of each individual LLC.  Most Single member LLCs that exist for owning a rental property will only need to be included on your Schedule E on your personal tax return.

For tax purposes you should be producing a P&L for each property anyway.

My point is it does not have to be THAT much more work.

-Steven

Account Closed · Answer

This isn't quite right.  If someone gets a judgment against one of your LLCs, your other LLCs are safe.  But if someone gets a judgment against you personally, all of your single-member LLCs are at risk.

In some states the judgment creditor can only get a charging order to take the distributions from the LLC.  Other states allow foreclosure on your LLC.  And some states will alllow the judgment creditor to liquidate your LLC.  This article has a pretty good summary, although I can't vouch for the chart at the end (it appears to be wrong with respect to Florida):

http://www.nolo.com/legal-encyclopedia/llc-asset-protection-charging-orders.html

http://www.foley.com/files/publication/ea1efec4-6da7-430f-9a2a-cbde0a85b18f/presentation/publicationattachment/182846ac-53ac-4e62-9948-d2395ff83078/americanbankruptcyinstitutejournal.pdf

Terry Portier · Answer

Yes much like a LLC but only the money invested in the S Corporation by its shareholders is at risk, barring extreme circumstances personal assets are usually protected, as they are with LLCs. An LLC is flexable in the operating agreement you can pretty much structure it as you want where you are bound by striker rules in a S. All S-Corps have hard and fast rules for how to remain compliant, who can vote on corporate practices, etc. These rules give shareholders and owners a real, clear path to follow, and that path is familiar

If you are going public or selling shares like the big fish S or C is the way to go, for most small business REIs LLCs. LLCs can not sell stock only interest, S and C can.

Amy Solomon · Answer

Does an S-corp protect personal assets?  I am starting my business (moving from a hobby) and I"d like to purchase and sell the properties (flipping) under an  incorporated business.  But I want to make sure I am protected personally.

Our old business was an s-corp.  We were hit hard having to pay taxes on the $100,000 in the business acount on Dec. 31st, even though it all got paid out to cover insurances and other renewels on Jan 5th.  So we had to pay taxes on that $100,000 as if we had made $100,000, but we hadn't made it, and never saw it.  Does anyone know anything more about this?

LLC Classification: Partnership, Corporation, or S Corporation?

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