What The Heck Do I Do Next
I am in the process of getting into buying,fixing and selling properties for profit. I will be doing this with a well trusted partner. We also plan to hold a couple properties for rent. Do I need a llc or S-corp. I am very concerned about getting screwed on taxes, which is better llc or corp. We have a silent partner that is going to help us buy the first home cash. What costs are there when buying a home besides inspectors and the apprasiel. What type of homeowners insurance will I need.
Both LLCs and S-Corps are pass-through entities which means that profits or losses get passed through to your tax return. You might look into a C-Corp which has its own profit and loss. Sometimes timing is an issue. I have heard strategies where an S election is made during early years when there are losses so these can be passed through to owners and then not taking the S election when the company shows profit. I am not sure if it still works that way, but you should consult with someone who has expertise on business structures to help you make the appropriate decision.
A C-Corp may not be good if your investment activity is to buy and hold. One of the main reasons is that with depreciation, passive loss activities usually result in a loss. There is no way to pass this through to your 1040.
However, you said you were going to buy, fix and re-sell. This is a business activity and not a passive income activity. Your properties are inventory and not depreciable capital assets. A C-Corp may be a good form of business entity.
Here is a quick overview of the business structures and how they effect your REI activity. Remember, since everyone is different, you should talk with a business structure pro before deciding:
LLC: Recommended for Holding
Transferring properties to an LLC is tax-free. The income is passed directly to the partners. In a law-suit, only a percentage of the profit can be taken rather than ownership interest (this is true in most states). Unequal distribution of profits is not allowed.
S Corp: Recommended for flipping.
The income is passed directly to partners. After you pay yourself a reasonable salary, you can take the profit out and only pay regular income tax on that profit without paying SE tax (which you will pay on the regular salary).
C Corp: Recommended for large companies
The C corp is very expensive to maintain. Also, profits are taxed at the corporate level and then at the individual level. This is were double-taxation comes into play. Your deduction rules change quite a bit though.
This is a very general overview. Hope it helps.
Joe
You make some good points Ed. The problem I have with C-corps for newbies is 1) the amount of time and money to keep a C-Corp up and 2) profits are taxed and then if profit is taken out of the Corp, that is taxed also.
C-corps are great with companies that give their employees benefits. Health insurance and retirement plans are only deductable in a C-corp. Taking a salary and stocking up retirement plans is a good way avoid the double taxation.
The best advice (as you pointed out) was talking with a business structure pro (either an attorney or accountant) and using their professional guidance in forming the business structure.
Thanks For All The Info, Really Helped
Find a GC that is also a licensed inspector.........then pay him for his / her time. It will be a valuable learning experience plus a way to make another contact.
NC