Posted by Penny on May 10, 2007 at 11:46:36:
Adam,
I’m not an attorney and I don’t play one on TV. So you will want to consult your business attorney and accountant for your situation.
That said, there are liability aspects and tax aspects to consider when deciding which entities to utilize. I’ve asked my business attorney similar questions and he told me this:
a) Sophisticated real estate investors usually have one LLC per property. This limits the liability to only the assets in the affected LLC. It protects your other properties should someone slip and fall then subsequently sue. Yes, it adds some additional tax & accounting overhead plus the LLC formation fees, but I look at it as asset protection insurance. Real estate income is considered passive income - meaning not subject to the 15.3% self employment tax.
b) Any business you start you will typically want to have as its own entity to limit liability to that entity and not put other assets at risk - same rationale but different structure. If you have one business that does your real estate buying/selling/managing, and another business, say a car wash, gas station, etc., you would probably want each business set up as a separate entity. Depending on how related the activities are, you could have them under one company, but an attorney and accountant would be able to advise you on the pros and cons of each approach. Your businesses would most likely be S corps, but there are other entities that may be appropriate and recommended by your attorney. S-corps profits are considered ordinary income and the salary you pay yourself and any employees is subject to employment tax.
The nice thing about LLCs and S-corps is that they are pass through entities, meaning that the profits/losses flow through directly to shareholders. The profits are not subject to self employment tax (medicare/social security for a 15.3% bite). Losses on S-corps are considered ordinary income and offset other income. Losses on LLCs are considered passive losses and depend on your income levels as to whether you can offset your ordinary income or have to carry the loss forward to a future tax year. There are also IRS limits on the amount of passive losses you can take.
I currently have an S-corp for a non-real estate business, an LLC for each investment property and will be forming another S-corp for the real estate investment management activities. The real estate S-corp allows me to show I am paying payroll taxes for my efforts in my real estate and keep the profits/losses in the LLCs as passive.
So you will probably have LLCs for your investment properties and S-corps for your investment services and other businesses.
Again, I’m not an attorney and highly recommend you consult with yours to determine what’s best for your situation.
Hope this helps!