Ed Allen wrote:
Portal Site Builder wrote:I thought this article might help some decide
http://www.mynewventure.com/s_corp_vs_llc
I currently have an LLC, but for tax reasons, it looks like I might change over to S corp.
LLCs are state recognized entities and S-Corps are federal entities. Therefore, in order to file Federal Tax Returns, all LLCs must either file the appropriate docs to be treated as an S-Corp or they are automatically treated as a Partnership.
I recommend S Corps to my clients UNLESS they are using a Self Directed Retirement Plan to invest in Real Estate.
Biggest differences are that:
S-Corps are "perpetual in nature" which means that ownership can change without the entity "dying". Partnerships and LLCs are not "perpetual" which means that when you want an ownership change the current entity ceases to exist.
S-Corps and LLCs electing to be treated as S-Corps have income that is not Self Employment income and is therefore not subject to SE tax (15.3%). Partnership income is subject to SE tax.
LLCs used to
Ed is exactly correct. The key to entity organization is twofold in my opinion and a bit of a balancing act. The things to consider are tax consequences and flexibility. Rarely is any entity 100% what you are looking for or need.
Rentals are just fine in LLC's as partnerships because rental income isn't subject to self employment tax and they are more flexible in my opinion for admission and termination of equity partners (some need for caution here as certian changes in ownership may terminae the partnership for axpurposes). Additionally, as LLC's have minimal maintenance requirements as far as the state goes they are an ideal shell to hold properties.
S-Corps are suited more to the operation of a true business, i.e. rehabs and other forms of non passive real estate activies. Additionally, I consider the annual maintenance requirements, i.e. meetings and minutes a great opprotunity to properly document and provide a good paper trail of transactions. Plus you can pay a reasonable salary and avoid the extra SE tax. It has been a discussion point for a while that eventually the IRS will adjust this at some point, but for now it is a valid planning opprotunity.
For non real estate activites I have only ever had a hand in forming 1 LLC...we instantly completed both forms I mentioned in my earlier post and converted it to an S-Corp. Every other true operational business entity I have helped clients create has been a S-Corp 99% of the time with a couple of C-Corps sprinkled in. LP's used to be a good choice, but with the reforms that happend in Austin a couple of years back on the franchise tax front I think their usefullness has declined a bit.
Entity organization is one area that I think most business owners and investors should spend more time understanding before they move forward. I have seen a couple of instances where a client did their own thing with out consulting an attorney or CPA and formed their entity and waited until tax time to figure out what it meant. Needless to say I had 1 client that paid a pretty penny for going it alone in selecting their entity. We got it fixed for them in year 2, but they paid way more in tax for year 1 and me some nice fees for fixing their set up.
Entities are really a very interesting topic.
