I have read in alot of the postings that when you intend to buy and flip a property you should use a corporation to buy and sell it but when you intend to hold a property as a long time rental you should form a LLC. What is the reasoning behind this strategy?
Posted by John Merchant on November 05, 2006 at 04:49:14:
One general rule is that most state law has thus far demanded much less rigorous “book keeping” for LLCs than for Corporations.
You’ll remember a corp needs to have its books and records kept pretty carefully, with resolutions, a log of stock holders, minutes, etc…all written and currently maintained.
The LLC is generally not so burdened, and may be much more easily maintained by the unit holder, without much in the way of minutes, resolutions, corp. books, etc…yet is still a huge encumbrance in the way of any creditor looking for your assets; if a property deed is in the name of an LLC, and your name doesn’t show on deed records, how would a creditor looking for YOUR assets find it?
Depending on the state you are in, the asset protection of an LLC and a Corp are the same. This is true for TX, AZ, CA and CO according to the attorneys I consulted in each before creating my business entity.
Problems with a Corp is that all year over year retained earnings are taxed at the corp rate and again when they are paid out as salary. There are exceptions for earnings held against payroll and other recurring expenses. In some states an LLC does not have to file a tax return. In all cases a corp must file.
Get the Nolo Press book on Corp vs LLCs. They are attorneys and give you a lot of great things to think about. There is no one size fits all solution, so use the one that meets the most of your goals.
Posted by Natalie-VA on October 18, 2006 at 12:31:30:
Mike,
I’m not an attorney or CPA, but mine advised me to do what you are saying.
One reason to hold the properties in separate entities is for asset protection. You might even consider multiple LLCs for multiple rentals.
The reason that you want to keep the rentals separate from the flips is that they are taxed differently and you don’t want any confusion between the two. Most of your rentals (when held over a year) are going to be taxed at the long term capital gains rate (usually 15% federal).
Most of your flips (held less than one year) are going to be taxed at the short term capital gains rate which is the same as your ordinary income tax rate.
We hold our flips in an S-corp. This allows us to pay ourselves reasonable salaries which are subject to self-employment tax. The remainder of the company’s profits are not subject to self-employment tax.
Additionally, we pay 15k each per year to our 401(k) plans and the corp gives 25% of our W2 income to our profit sharing plan. I don’t know that these items are unique to corps…just thought I’d throw in the info.