William Bronchick talks about LLCs, S-Corps, and C-Corps and what works for different types of investors.
Choosing the correct type of entity to have your properties in is critical from a asset protection standpoint and also when considering tax status, as William Bronchick tells us.
Mike: Welcome back to the FlipNerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Bill: Hi, I’m Attorney Bill Bronchick, one of the REI Classroom instructors and host of LegalWiz.com.
Mike: This REI Classroom Real Estate Lesson is sponsored by UglyOpportunities.com.
Bill: Should I set up an LLC? Should I set up a corporation? If it’s a corporation, is it an S corporation? Most people start out their investments in their own name. Which is usually a mistake because of the liabilities involved and also because of the tax issues involved. If you do deals in your own name, you’re going to report on your personal tax return. Now, if you’re doing rentals, rentals are considered a passive type of activity or passive investment. You report your rental properties on what’s called a Schedule E of your personal tax return. And you pay federal income tax and state income tax if you have it on that income.
What you don’t pay is payroll or self-employment tax because it’s a passive investment. If you wholesale, if you flip, if you do anything that looks like earned income, like a broker would do, then it goes on Schedule C of your personal return. Which means you pay federal, state income tax, and self-employment tax, which can be quite a hefty number. Now, if you want to avoid that self-employment tax, then you’d report on a corporate return.
Now, when I say corporate return, I mean a corporation. A regular corporation such a C or an S. I’m not going to get into the differences in this video because it’s quite lengthy and you can talk to your CPA. Most people, when they set up an entity for real estate, they do an LLC. Now, an LLC doesn’t have a tax return. By default, if you’re the only owner, or you and a spouse, you’re going to continue to report as if the entity didn’t exist i.e. on your personal return rental Schedule E, flips, wholesales, etc. Schedule C.
While the LLC might give you some bit of liability protection from your activities or your business, it doesn’t give you any tax change. Which could be good or could be bad. If you’re doing a lot of ordinary income flipping and wholesaling, you’re paying the self-employment tax. The way to avoid that is to either, A, use a corporation or, B, have your LLC elect to be taxed as a C or S corporation.
Now, I said an LLC doesn’t have a tax return. By default, if it’s single member, one owner or husband and wife, you ignore the reporting and report on your personal return. If you’re two or more people, then you’re a partnership. You file a partnership return, but you can overcome those defaults and file as a corporation. So if you’re already doing single member, talk to your accountant, talk to your tax advisor about converting that LLC into either an S or C corp for tax reporting.
Now. it doesn’t mean that your LLC is not an LLC anymore. It still is an LLC and you still treat it as such. You’ve got managers, you’ve got members, you don’t have to do annual minutes and meetings and all that stuff like a corporation does. But for tax filing, you can be a corporation. I hope that makes sense and it also is going to save you a lot of money and headache coming down when it is tax time.
This is Bill Bronchick. I hope you can join this discussion on which entity you should use for buying and selling real estate?
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