Should I have my LLC taxed as an S-Corp?

[David Drew]

I've created an LLC in Broome County, New York. It's time to decide whether to leave it as pass-through taxable or choose to have it taxed as an S-Corp. My plan is to use the entity to hold my buy & hold property. One to start. I'm right now, scaling my portfolio from 1, up to 3 properties. The LLC will hold 1 / 3. Can/Should I receive rent payment from properties NOT held in the LLC, using the LLC? I want to close on two more properties by June 2017. If my aim is to scale the business now and use a cash flow generating model to do so, am I better off filing for the S Corp?

Additionally, as I seek deals to buy more property, is is wise to use the LLC name in my marketing efforts? Any reason not do so? I was thinking that since my LLC is generically named that maybe my marketing efforts would be more successful using a flashier DBA name.

[Sylvia B.]

Originally posted by @David Drew:

Thanks again @Meagan Barkley.  This is good stuff and pardon me if I'm still not getting it.  So do you agree or disagree with this:  Seems to be contrary to your assessment.  I read this to mean (1)that I'd be taxed normally on wages I pay myself.  (2) I'd be taxed less (dividend rate) on wages received from rental income.    

A key feature of the S corporation is its ability to minimize overall tax liability for you and your business. Because of its nature as a corporation, only the wages paid to its owner/employees are earned income subject to FICA tax for Social Security and Medicare. Other net earnings that pass-through to the owners are considered dividend income. This means those payments not subject to SECA tax and—provided the shareholder material participates in the business—they are not considered passive income.Thus, an S corporation can do some tax planning that can not be accomplished in a typical LLC.

 Hubby & I have two LLCs. One holds our rental properties and is simply a disregarded entity, the other is for a different business and is taxed as an S corp, so I have practical experience with the differences. 

First the S corp. This business rents the building it occupies from our properties LLC. This is an expense to the S corp and income to the LLC, but is passive income rather than earned income. This is an important distinction. We take $x per month as wages and an equal amount as distributions. FICA & unemployment taxes must be paid on the wages, but not the distributions. It files its own tax return (deadline March 15) but the return is only informational. Any income the S corp has is passed through to our personal taxes, but is not subject to self employment tax (FICA) as it would be without the S corp status.

Income from the LLC that holds the properties is also passed through to our personal taxes, but there is no additional return required. This is passive income, not subject to SE tax. This company does not pay us wages, since we can take any amount we choose as distributions.

So this is what our tax picture looks like:

• Wages  ----  line 7 on 1040 like any other W2 income + 15.3% FICA + 1.43% State Unemp + $42/person Fed Unemp.
• Income from S corp ---- line 17 on 1040 (could be profit or loss)
• Income from properties LLC ---- line 17 on 1040 (could be profit or loss)

Those, along with anything else on lines 7-21 make up our total income. There is no difference in rates on the 1040 between W2 income and profits from an S corp or rentals. The difference is the FICA and unemployment taxes. Every dollar you can move from W2 income to passive income saves you well over 16%. I like that kind of return!