Posted by Merez(IA) on July 01, 2006 at 21:08:15:
Actually a LLC can be taxed as a disregarded entity (ie the business income and expenses go on a schedule on your personal return without having to file a separate return), as a partnership or as either form of corporate entity (a C-corp, taxed at the business and at the individual level or a S-corp, which is a flow through entity). The decision to how it is taxed is based on the number of owners and what elections are filed.
As with any entity selection, I highly recommend that you consult with an accountant and a lawyer about the report and legal requirements in your area, as well as they can help you make the best decision based upon your unique circumstances.
That being said, it seems that many investors that do rehabs usually use an s-corp. S-corps can pay the owners a salary (which is subject to se taxes) and then treat any additional distributions (of income) as a reduction in the capital (which aren’t subject to tax). However, there are various types of transactions that can make the s-election revokable (such as the majority of the income being from rents, interest or dividends). Which is why you see many rentals set up in llc’s; as well if you rent a property in an llc, you can put your partication in the llc as active real estatement activity, instead of ordinary income (which gets around the se tax issue).
Granted, this is a very brief summary of some fo the issues involved and isn’t a substitute for qualified, professional advice.