C or S Corporation? - Posted by Elise

Real Estate Investing
1

Posted by Frank Chin on August 17, 2005 at 07:34:40:

Elise:

There are many considerations here, which I see had been discussed within this thread. As to using CPA’s, particularly one who is a close friend can make the decisons extremely difficult. I’m very loyal to professionals I use, and have a bad habit of keeping them even when they mess up.

Like all of us, CPA’s and attorney’s all have comfort zones, where they do the same thing day in and day out, year in and year out, and hate to look at or try something new, and sometimes may even discover they been advising the wrong thing for years. Some may learn from the bad experience of another client whose situation may have nothing to do with you. Read some threads on CPA/attorney opinions on creative REI, i.e “flipping is illegal” etc.

Some CPA’s are “tax audit” orientated, and would do things that minimizes tax audits. They get scared when you talk about tax avoidance. Even I had such a discussion with my CPA this year about this. Due to writeoffs in my real estate, and my active business, I don’t have a lot of “taxable income”, but I have a tax credit coming because of an adoption we did in 2004. He’s telling me to hold off taking the $10,000 adoption credit as it might trigger an audit.

The funny thing is, its very simple matter, you do an adoption, you get the credit, up to $10,000 if you spent $10,000. We spent close to $20,000.

As to the complexities of having another C Corp?? For asset protection purposes, as you’ll plan to do some “buy and hold” for rentals, some suggest a NUMBER of LLC’s, each with its own bank accounts, tax returns, etc. So, if you have 4 LLC’s, anyway, what’s another “C Corp”.

As I mentioned, to keep things simple, just have the C Corp charge a fixed monthly fee. No biggie.

OF course, you’ll have to think long term, start simple and evolve. In that sense, I agree with your step by step appraoch.

Frank Chin

2

C or S Corporation? - Posted by Elise

Posted by Elise on August 14, 2005 at 21:25:18:

What type or corporation is better to use for a business which is primarily doing wholesale and rehab deals?
Almost all of the properties are resold in less than three months, so no long term holding periods are involved.

I want to use a corporation to take advantage of all the benefits and deductions that I can, and for the liability protection.
I have been using an LLC, but I have been told that a corporation is better for a flipping business.

Thanks in advance!

3

Re: C or S Corporation? - Posted by Tom Bazley, CPA

Posted by Tom Bazley, CPA on August 16, 2005 at 07:30:26:

There’s really no way to say which is best just from the limited information we have. It all depends not only on your current income, but on whether there’s income from other sources, what your goals & objectives are, etc. You need to speak w/ a competent CPA (ditch the one you have now who sees no reason to be aggressive) who understands real estate.

I have some clients who are in your position who use a C-corp & others use an S-corp. I even have a few who use a limited partnership.

4

Re: C or S Corporation? - Posted by Stan

Posted by Stan on August 15, 2005 at 16:23:00:

How many deals have you done so far?

5

Re: C or S Corporation? - Posted by Natalie-VA

Posted by Natalie-VA on August 15, 2005 at 10:25:38:

Elise,

We use an S-Corp for our rehabs. Check with your lender first to make sure they will loan to a corporation.

–Natalie

6

Re: C or S Corporation? - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on August 14, 2005 at 23:15:40:

Each from has benefits and problems.

It could help if you define the types of benefits you expect the corporation or company to cover. Some things like medical benefits and pension contributions are not possible in certain entities.

Double taxation can be a problem with C corps.

I am not sure there is any real difference in the liability protection between an LLC, a C corp and an S corp. One thing that is true with all is you lose the protection if you do not run your corporation or company to commonly held best practices.

At some level you will need to stop the focus on the best and most efficient company structure and focus on making money from investing. Once you are getting most of the benefits you would like focus on generating more income and paying a bit in taxes. Lenders like to see taxable income when they review loan applications.

John Corey
Chelsea Private Equity LLC

7

Re: C or S Corporation? - Posted by Elise

Posted by Elise on August 17, 2005 at 01:48:13:

I appreciate your advice, Tom. Thank you for commenting!

Everyone’s situation is unique. From what you say, there is no such thing as a “one size fits all” answer to my question.

I didn’t really expect one - just some guidelines and caveats about how to make a decision on this while avoiding the pitfalls and traps.

Picking the correct entities from the beginning would save me the trouble of having to unravel a bad choice later on down the road.
Having a good plan in place should enable me to maximize my tax efficiency, and thus my results.

I will never be a tax or law expert, but I just want to have a good understanding of the principles in play here in order to make good choices.
And I wanted to do things on purpose.

I will probably have to seek a tax professional who is “clued in”, as John stated. (I like that phrase, John!)
This I have resisted up to now because my CPA is an old friend from high school, and I am fervidly loyal to my friends.
I know this is emotional, and not logical, but it weighs on me nonetheless.

8

Re: C or S Corporation? - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on August 16, 2005 at 10:05:39:

Thanks for contributing Tom. As a CPA your statement is a bit more definitive and clear then what I have been trying to say.

John Corey
Chelsea Private Equity LLC

9

Re: C or S Corporation? - Posted by Elise

Posted by Elise on August 15, 2005 at 17:07:31:

I’ve done thirty-one wholesale quick turns to investors for an assignment fee.

I’ve got two being rehabed right now, and two more that were rehabed and sold to a retail buyer.

10

Re: C or S Corporation? - Posted by Elise

Posted by Elise on August 15, 2005 at 17:24:53:

Thanks for the feedback, Natalie!

I have been given the advice that I should start out with a C-corporation and accumulate the earnings to build up the business assets.

That way I won’t have to worry about the double taxation of dividends problem or the excessive retained earnings problem for a while. Later, I should elect S-corp status when I am ready to distribute the earnings.

I don’t know if this is good advice or not.

I hoped to let the corporation reduce it’s taxable income by giving me a big fat compensation package with all the executive perks that it can under the law! That way I can get the most out of it while reducing my taxes to the minimum under the law.

I’m not advocating tax evasion here, just smart tax avoidance.

11

Re: C or S Corporation? - Posted by Elise

Posted by Elise on August 15, 2005 at 17:15:07:

Thanks for the advice, John!

I have done some deals already, as I posted just above.

I use a Limted Liability Company right now, but I have read that a corporation allows you to take advantage of more benefits that are tax free to me. We are making money, and I believe that we are paying way too much in taxes on this, so I wanted to get a little smarter about how we had things set up.

My goal is to maximize my benefits to let the corporation take a tax deduction, but not have the benefit be taxable income to me personally. I just didn’t know if a C-corp was better for this, or an S-corp.

12

Re: C or S Corporation? - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on August 15, 2005 at 20:44:08:

Elise,

The advice is not sound based on how you have presented it.

At the end of the tax year the company will have to pay taxes on the income. Some of that can be reduced by paying you a salary or other costs (employee benefits). Some of the benefits are limited by the amount of income you receive (which is taxed).

I am not sure that you can change a C corp to a S corp later without triggering a tax payment at the C corp level first.

I agree on the intent that you want to maximize the tax deductions. Just that maybe what you think is not taxable is really still going to trigger taxes at a different level.

You really need a CPA who is very schooled in corp returns and RE investing.

BTW - There are some specific rules related to how RE is taxed in a corporation if the company has no real income other the holding RE.

For the most part the reason you are paying as much as you are in tax is because you are generating ordinary income (not capital gains). That income can be received as a salary (w2 income) which can help on loan applications. You can also set up a pension program that lets you save a large percentage each year. Medical benefits also can be covered. Just be careful about being stopped by the IRS if the corporation has no purpose other then tax avoidance.

John Corey
Chelsea Private Equity LLC

13

Re: C or S Corporation? - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on August 15, 2005 at 17:24:11:

My answer does not change much even with what you wrote.

Some benefits are allowable in a C that are not allowable in other forms. C corps have the effect of double taxation for any funds left in the corp. The income does not just pass through.

There really is not one answer. Part of your RE business could be in one vehicle for tax reasons while other aspects should not be.

Have you spoken to a tax attorney or a CPA about this? I would suggest that anyone you speak with needs to be someone who does a lot of business with RE investors. They will be more current then a professional who rarely sees RE deals in their client’s tax records.

If you know some successful investors they might be able to point you to a tax professional. Understand also that some folks post advice based on what they are doing only to realize years later that the IRS is not happen with how they treated some deductions. Not everything someone does makes it legal or advisable.

John Corey
Chelsea Private Equity LLC

14

Why not both ? - Posted by Frank Chin

Posted by Frank Chin on August 16, 2005 at 07:39:22:

John:

Nice meeting you at the convention.

Noticed Elise mentioned she’s done 31 wholesale deals, plus rehabs. With this, I beleive she can take advantage of both “C and S Corp”'s, if you don’t mind the additional paperwork, and in NY state, the additional franchise taxes. I file returns for C Corp, S corp, plus and LLC.

What I do is project ahead benefits I plan to flow thru the C Corp for the year, such as medical, co-pay, auto, conventions ets,. and just flow enough income thru it to avoid double taxation. In Elise’s case, that might be the first 6 or 8 deals. After that, she can book the deals thru the S Corp.

I also the have the LLC pay a fixed management fee monthly to the C Corp, and I find this is a good way of managing a fixed stream of income to the C Corp. So, Elise may book all her deals to the “S Corp”, and then just flow enough to the C Corp thru managment fees to pay the benfits, and have no income on the C Corp level.

I find this separation also useful in my case where the LLC has employees, and I give myself better perks. By giving myself better benifits in the C Corp, I don’t run into discriminatory issues, such as in health benefits, as compared to if everything is in one entity.

Frank Chin

15

Re: C or S Corporation? - Posted by Elise

Posted by Elise on August 15, 2005 at 17:40:15:

Thanks again for taking the time to respond, John.

And I appreciate what you are telling me. I really want to do things the right way. I also know that a corporation has a lot more formalities that I must observe, but I think that I an do this and it still be worth it.

My current CPA has not been too helpful with this. She says that I should just be happy paying the taxes that I am paying because it means that I am making money. She sees no reason to for aggressive tax avoidance, even though it is my biggest “expense.” I am not happy resigning myself to this, so I might have to seek better advice like you recommend.

It’s true about the last warning you made above. You have to make sure things check out. Some things don’t pass the sniff test, if you know what I mean.

16

Re: Why not both ? - Posted by Elise

Posted by Elise on August 16, 2005 at 22:20:15:

Thank you for commenting, Frank!

This is the strategy I had in mind to a certain extent, but I was thinking for some reason that it was an either/or decision - C or S corp. It’s not, is it?

I planned on keeping the LLC for the properties that I was going to hold long-term, but that’s a different issue.

I didn’t want to make things too complicated as far as the entities I was setting up, and loose track of my main goal of doing business, as John pointed out. But there could be a justification for having more entities as the business grows.

I just have to keep in mind John’s warning to make sure that I have a valid business purpose for all this I guess. I don’t want to cross the line in getting too aggressive with tax avoidance.

17

Re: C or S Corporation? - Posted by Tom Bazley, CPA

Posted by Tom Bazley, CPA on August 16, 2005 at 07:25:25:

She says that I should just be happy paying the taxes that I am paying because it means that I am making money. She sees no reason to for aggressive tax avoidance, even though it is my biggest “expense.”

You need a new CPA.

18

Re: C or S Corporation? - Posted by John B. Corey Jr.

Posted by John B. Corey Jr. on August 15, 2005 at 17:47:37:

I do not know your CPA so I can not say if you should stay with them. If RE deals are not a big part of many of her customers tax records maybe you can trade up to someone who is not aggressive as much as clued in to the finer points of RE tax deductions.

One way to view things is to use a C corp. for property management and other things that provide current income but nothing that is really appreciating. Run your personal medical benefits, your pension contributions and other business expenses related to the company there.

Use a pass through entity for anything that will hold assets that appreciate. Adjust as need be for the state filing fees as sometimes the state is trying to get you not to use a structure. Or pick a different state if you do not need a local presence.

John Corey
Chelsea Private Equity LLC