Should I star an LLC or S-Corp for a House-Flipping Business?

[Dennis Soto]

Hello all,

I recently lost my day-job due to COVID-19, and I'm considering going full-time investor in. My strategy is to start a house-flipping business in New Jersey to gain capital and once the house market settles (or I build enough capital) buy-and-flip hold properties that will cashflow substantially. I know that for buy-and-hold properties, the best entity to protect your assets is an LLC. However, I've heard that for short-term RE (such as flips) its best to have an S-Corp entity (for tax purposes).

Is this true? 

Can you please explain why or why not?

[David M.]

@Dennis Soto

Of course, consult a professional...

First, a S Corp is a tax status that can be elected by a LLC or a C Corp. A S Corp itself is not a legal entity...

The main advantage of the S Corp is that you can save on self employment taxes. You are required to pay yourself a “reasonable salary. Beyond that, you can take the remainder of your profits as distributions, like a stock dividend, and save yourself on the fica and self employment taxes. However, there is some accounting overhead/charges required with a S Corp so unless you are really making a profit, its not necessarilyworth it.

The issue with flips is the irs considers it earned income subject to self employment taxes and taxed at your ordinary marginal rate. Flipping is NOT investing for tax purposes.

So, probably start with a LLC. If you are really turning good profits and will do so for the foreseeable future, make the S Corp election. You can't just elect and "unelect" the S Corp status Willy-billy...

Make some sense? Good luck.