Insurance Agency & Rentals, S-corp/LLC Tax Strategy
I know the S-corp/LLC thing has been beat to death on the forums, please look over my plans to see if you aggree with my conclusions:
Currenty and future business in North Carolina:
Insurance Agency - Starting a insurance agency that I expect to show low profits in year 1 (maybe a loss if I may myself a moderate salary). Long term I expect it to profit ~$150k per year. Probalby in S-corp. This is my big question.
Other:
Spouse income $35k per year.
I recieved $15k per year through another passive investment as pass through income.
I have a Property LLC (residental rentals) that showed a $10k loss last year (bought 10 properties last year so closing expenses, depreciation, and improvments caused loss), I expect this group to show small gains in the future.
I have 5 rental properties in my own name. Need in own name to qualify for credit union awesome 3.75% loans (can only adjust every 2 years at 1% max change). These will probably show a $10k gain per year.
_____________
So getting back to insurance agency, I plan to use profits to purchase more rentals, and don't need to pull a lot out for living expenses since cash flow from rentals pays most of my bills.
Option 1, agency in s-corp taxed as corp. Reasoning is that I could pay pay myself a fair salary, say $40k per year to satisfy my active involvement. Remainig money could be held in business as passive actvity at the low tax rate and and used to form more Property LLCs owned by S-corp.
Option 2, agency in s-corp taxed as pass through. Pay myself fair salary of $40k and move "passive" profits to other LLC that I would directly own. LLC activity should product paper loss to ofset gains from insurance company.
Thanks in advance for any options on this.
I think I see my own errors now:
In option 1, I could just distribute to myself for whatever reason I wanted b/c that is the "passive" part of the income.
I guess it would be best in my case to be taxed as a corporation.
--------------------
So if agency makes $150k per year, pays me $40k of that, agency pays corporate taxes on $110k at a low rate. If can show paper losses on other real estate ventures I could lower my taxes on the $40k I am paid.
you "never" want to hold appreciating assets in a c-corp.
you can't do 1, unless it was a c-corp. w/ an s-corp all profithas to be distributed.
Do you want to have all these assest in your insurance agency.
If someone sues the agency, now there are alot of assets.
So an S-corp cannot hold profits?
I was saying have and S-corp for insurance, if that S-corp for example profits $150k per year, pay $40k to myself to satisfy active role. Move rest of $110k passive to a new LLC (owned by me personally) for real estate investments. So if I understand it correctly this $110 would either pass through if I elected it be treated that way (as a pass through) for passive; or if taxed at corporate I would be free to move it out since it is passive(?) or have to distribute as dividend(?).
or
If it was the later and I was going to be taxed high, maybe I should have a S-corp that owns a insurance LLC and a real estate LLC, all protected that way except the S-corp, but most activity would be in the LLCs so unlikely.[ Edited by c5hardtop on Date 06/29/2004 ]
So an S-corp cannot hold profits?
No. must be distributed to shareholder.
I was saying have and S-corp for insurance, if that S-corp for example profits $150k per year, pay $40k to myself to satisfy active role. Move rest of $110k passive to a new LLC (owned by me personally) for real estate investments. So if I understand it correctly this $110 would either pass through if I elected it be treated that way (as a pass through) for passive; or if taxed at corporate I would be free to move it out since it is passive(?) or have to distribute as dividend(?).
If you had a C-corp, earned 150K, paid yourself 40K in salary, and paid c-corp tax on the 110K, the amount net of tax could be contributed to an LLC owned by the c-corp.
But the the profits from the c-corp are double taxed again.
if you had a s-corp, you could pay all as salary or other distribution (if posible), pay tax on your 1040, and then do w/ the money as you please. Sounds like less tax. Unless the c-corp held LLC never makes a profit (3 of 5 he does)
or
If it was the later and I was going to be taxed high, maybe I should have a S-corp that owns a insurance LLC and a real estate LLC, all protected that way except the S-corp, but most activity would be in the LLCs so unlikely
unless the insurance s-corp get sued, but unlikely if it's a holding entity. (maybe that's what you were saying"
I must have obviously missed a lot of information from what I've seen so far. Can you recommend any online or paper reading that will give me more in depth information?
I was leaning toward S-corp (over LLC), the advantage would be no self employment taxes if I understood that part correctly. So in my example, $150 business profit, $40 distributed at salary, am I correct to say the $110 profit the entity makes would distribute as pass through on either (S-corp or LLC), but it was in the LLC I would also owe self-empolyment taxes on the $110k.
Am I correct on this part? I had read somewhere that a S-corp can separate what is considered "passive" and "active" income, an LLC could not?
BTW, thanks for your advise!
Stockpro99's post on page 2 of tread:
http://www.thecreativeinvestor.com/ViewTopic27799-23-16.html
So if this correct, the $110k (in example) could come down as a capital gain... which in 04' was 15%. This would be a huge advantage to do an S-corp.