LLC vs S-Corp

[N/A N/A]

I'm looking to start a company with two family members (cousins) for long term real estate investments in rental properties.

We are trying to determine whether a LLC or S-Corp would be a better fit. Initially any cash flow would stay in the business.

We plan on meeting with an accounting and lawyer but I'd like to find out what other people on this board are using to protect themselves and shelter taxes/income.

Any input is greatly appreciated.

Thanks,

Kelly

[Randall Mixon]

Asking the IRS to treat the LLC as an S corp does not make it an S corp for legal purposes--only for taxes. But it can be very advantageous to do so, for people who flip and/or just control property without taking ownership. If you do Options, sandwich Lease Options, quick-turn flips, assignments, and basically anything but buy-and-hold rental property (held for at least a year), an S corp is superior to an LLC. The LLC would pay 15.3 percent in self-employment tax on all its profit. The S corp does not pay self-employment tax. Eventually, you would have to pay yourself a salary, and then you would have 7.65 percent deducted from your paycheck, and you would match that as the employer. Well, 7.65 plus 7.65 equals 15.3--but you would make your salary as low as you can reasonably justify. The rest of your profit would remain exempt.

Many attorneys and CPAs are so gung ho about recommending an LLC, and maybe it's partially the invesdtor's fault for not clarifying what their main activities will be. Many professionals are ignorant about creative real estate. Some of my students have had their LLCs drawn up by an attorney (usually paying way too much) and plan on doing nothing but flipping or sandwich Lease Options. If you are doing sandwich Lease Options, for example, although you are technically collecting rent, for tax purposes, it's NOT rent. It's ordinary business income. So, the LLC would pay an extra 15.3 percent over the S corp (a big chunk of change) UNLESS the LLC avctually had the Deed (owned it).

You can't ask the IRS to tax you as an S corp. it's slightly more complicated than that. If you find yourself in the above situation, you have to first fill out Form 8832 (Request For An LLC To Be Taxed As An S Corporation). Once approved, then you have to make a request to be taxed as an S corp (Form 2553). Aren't taxes fun!?! *that was sarcasm*