LLC, S-Corp, Or Both?
Hello all,
I have gathered that S-corps are better for short term holdings, and LLC's are better for long term. So would it be a good idea to set up both if I am planning on doing some lease purchase options (short term), and some owner financing deals were necessary, in which will just be set up as retirement investments? Thanks in advance for any suggestions!
Keep in mind that short term is refered to as one year or less and long term is one year or more.
You can always have your attorney prepare the documents as needed rather than preparing them ahead of time.
As far as I know, there is a difference in depreciation of rental property between S-Corp and LLC. So, LLC is better to hold rental property, while rehab and other stuff is fine with S-Corp.
There are many advantages of using an LLC over an S-Corp. For example, owners who intend to acquire appreciating assets for their business, such as real estate, want to avoid S corporation taxation for two principal reasons:
Appreciated property cannot be distributed by the S corporation to its shareholders without the recognition of gain; and money borrowed by an S corporation will not increase a shareholder's basis in his or her stock.
These two limitations result in several problems which, like the problem of the S-Corp one class stock rule, may not be immediately apparent, such as the possible recognition of gain in the following instances:
(1) conversion to a partnership;
(2) exit from a real estate investment (because each shareholder cannot enter into a like-kind exchange; or distribution of S corporation loan proceeds to shareholders.
Also unlike S-Corps, profits of an LLC can also be distributed disproportionately, which offers many additional advantages.
Another benefit is the availability of the step up in basis election (Section 754). If an LLC files a Section 754 election, you get a stepped-up basis for any new member coming in. You can't do this with either an S corporation or a C corporation.
Some LLC estate planning advantages include:
(1) You may receive significant valuation discounts for property transferred to family members through an LLC. The discounts include the minority, liquidity, and marketability discounts, etc.
(2) With an LLC it is easier to transfer property, especially real estate and other property that is not easily divisible. A member can make annual gifts to his children of parts or units in his LLC that owns real estate. This is less cumbersome and expensive than preparing and recording a deed to an undivided interest each year.
(3) Unlike the S-corp rules, under the current LLC tax law, at least until 2010, a member's death beneficiaries will step up the basis of a partnership interest on the death of the partner or member. No gain is recognized on the subsequent sale or disposition of the partnership interest except to the extent of appreciation or depreciation after the date of death or the six month alternate valuation date.
Hope this help.
If you engaged in a active business, like flipping properties, or many other businesses that are not passive by nature, the S-corp advantage would be that you could take out capital (as a capital gain) without paying self employment taxes on that amount. You would need to draw a fair salary for your active participation, but this could be less than the total gain. In an LLC in the same case, you would owe self employment taxes on the full amount. While the "time frame" is used as a guide on many on this forum, and for good reason, its not set in stone. Sometimes a passive real estate LLC may still sell some properties in a short period of time, and just b/c you hold something over a year does not clear you of dealer status (such a general contractor that may have a house on the market for over one year). Its the nature and intend of your business.