Why LLC vs scorp for rental property [Fact-Checked]

Last updated : Sept 22, 2022

Why is LLC better than S Corp for real estate?

Generally, an LLC is typically better for rental properties than an S corp. However, both offer: Liability protection for the owners. The chance to avoid double taxation by being taxed as a partnership.

Why is S corp not good for real estate?

The issue with real estate is that the step-up does not apply to any of the S-Corporation's assets. This is a huge negative of having S-Corps hold your real estate, especially if the plan is to hold onto the rentals long-term and eventually pass them down.

What type of corporation is best for rental property?

The Limited Liability Company (known as LLC) is the best entity for most real estate and mortgage investors who "buy and hold" their investments. When you buy and hold real estate it is considered a capital asset.

What are the advantages of putting a rental property in an LLC?

The biggest benefit of creating an LLC for your rental property is that it can insulate you from personal liability. Yes, you may have liability insurance, but if someone is seriously injured on your property, they can sue you personally for medical expenses and damages above and beyond the limits of your policy.

Do S corps pay more taxes than LLC?

Who pays more taxes, an LLC or S Corp? Typically, an LLC taxed as a sole proprietorship pays more taxes and S Corp tax status means paying less in taxes. By default, an LLC pays taxes as a sole proprietorship, which includes self-employment tax on your total profits.

Which is better for taxes LLC or S Corp?

LLCs. As an LLC owner, you'll incur steep self employment taxes on all net earnings from your business, whereas an S corporation classification would allow you to only pay those taxes on the salary you take from your company. However, itemized deductions could make an LLC a more lucrative choice for tax purposes.

What are the 2 main disadvantages of an S corporation?

Disadvantages of S corporation types include legal barriers that prevent them from having more than 100 owners or having shareholders that are non-U.S. persons. S corporations are also handicapped by requirements to hold annual meetings and appoint a board of directors.

What is an S Corp designed to avoid?

Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.

What type of business is best for real estate?

Limited Liability Companies (LLCs) are popular business entities for real estate investors because they are a hybrid of the other entities' best features. LLCs combine the tax advantages and flexibility of partnerships with the liability protections of corporations.

Can you live in LLC rental property?

An LLC is a business entity that has its own rights, and buying and owning real estate are indeed among them. So the answer is yes, you can in fact live in a house that is owned by your LLC — as long as your operating agreement allows it.

Can I rent my home office to my S corp?

The S corporation can pay you rent for the home office. The S corporation can pay you for the costs of a home office under an "accountable" plan for employee business expense reimbursement.

Can an S Corp own a vacation home?

Generally, there is no rule preventing you from buying real estate for personal use through your S Corporation, C Corporation, or LLC.

What are the disadvantages of an LLC?

• Cost: An LLC usually costs more to form and maintain than a sole proprietorship or general partnership. States charge an initial formation fee.
• Transferable ownership. Ownership in an LLC is often harder to transfer than with a corporation.

Can my LLC buy my house?

You may wonder, "Can an LLC buy a house?" The short answer: Yes. You may want to explore the idea of buying a house with an LLC to enable your business to own property or to have your LLC make your next real estate purchase.

When should I convert from LLC to S-Corp?

The right time to convert your LLC to S-Corp From a tax perspective, it makes sense to convert an LLC into an S-Corp, when the self-employment tax exceeds the tax burden faced by the S-Corp. In general, with around $40,000 net income you should consider converting to S-Corp.

What advantage does LLC have over S-Corp?

If your business is structured as a corporation, S-corp taxation allows you to avoid having company profits taxed at both the corporate and shareholder level. If your business is an LLC, S-corp taxation allows you to be a company employee, potentially saving money on taxes.

Do S corps get taxed twice?

Elimination of Double Taxation When a corporation's shareholders are also its primary owners, that means proceeds are taxed twice. In an S Corporation, by contrast, all of the corporation's net income passes straight through to the owners and shareholders, who pay taxes on it via their personal returns.

Should I elect my LLC as an S-Corp?

Bottom Line. The S corporation is the only business tax status that lets you save on Social Security and Medicare taxes while avoiding double taxation. An LLC taxed as S corp offers benefits of a corporation while also providing flexibility on income treatment.

How does an S-Corp pay less taxes?

S corps are considered pass-through entities, which means that your business doesn't pay taxes on the profits you earn—you, the owner do. Unlike C corps, where both the business and owners pay income taxes, an S corp avoids double taxation as a pass-through entity.

Is it better to be a single-member LLC or S-Corp?

LLCs offer more flexibility in terms of allocating profit percentages to owners. S corporations offer better options for how profits are distributed. They can be paid as salaries to the owners, or they can be given as profit distributions. S corporations provide more options for tax planning and reduction.

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this is bigger pockets daily real estate investing education for your ear balls the following article was first published on biggerpockets.com blog we'll link to it in the show description but you can see the photos comments and related articles llc versus s corporation which is better for real estate by scott smith disclaimer this is designed to provide general information regarding the subject matter covered it is not intended to serve as legal tax or other financial advice related to individual situations consult with your own attorney cpa and or other advisors regarding your specific situation because protecting personal assets from liability is an important consideration when starting a new business many self-employed real estate investors organize their companies as a type of corporation or limited liability company llc two common choices among small business owners are s-corps and series llcs i help my clients set these up to protect their assets plan their estates and help avoid paying unnecessary taxes while your unique situation may call for a customized approach i've put together this quick guide to help you decide whether an s corp or series llc is the best business structure for your new venture s corporations and series llcs what are the differences while there are many similarities between s-corps and series llcs there are some critical differences between the two options tax status versus entity type the s-corporation or s-corp for short is not a type of legal entity but a tax status that the irs can grant a corporation on the other hand series llcs are a type of business entity created by state law fun side note llcs can also choose for the irs to tax them as as corporations for this guide i decided to focus on corporations with s-corp tax status shareholders versus members since s-corps are corporations they are owned by shareholders whereas series llc owners are called members the irs places the following restrictions on s-corporation ownership an s-corporation cannot have more than 100 shareholders s-corp shareholders must be u.s citizens or residents an s-corp cannot be owned by llcs corporations partnerships or many types of trusts conversely series llcs can be owned by an unlimited number of members and can have unlimited subsidiaries in series board of directors versus managers as corporations s-corps must be managed by a board of directors and officers with a series llc the owners can manage the company themselves or hire someone else to run the business required formal process versus no required formal processes like all corporations an s-corp must abide by statutorily required formalities to maintain its corporate status examples of common corporate formalities include creating and following bylaws issuing stock or shares holding at least one shareholders meeting each year taking minutes keeping accurate records a serious llc and its series are not required by law to follow these types of formalities however the irs does recommend that llcs follow an operating agreement hold annual meetings and document all significant decisions s-corps in series llcs what are the benefits while s-corporations and series llcs have their differences they can offer similar benefits to real estate investors liability protection both s-corps and serious llcs offer their owners protection from personal liability for the businesses debts corporations and llcs are considered separate legal entities from their owners this means that the businesses creditors cannot go after the owner's personal assets to pay company debts with the series llc you also enjoy asset protection between series a creditor cannot access the property of one series to pay the debts of the other pass through taxation standard corporations which are also called c corporations or c corps are subject to double taxation the corporation pays income tax on the profits and then shareholders must also pay income taxes on the dividends they receive both s corps and series llcs are passed through tax entities this means that the company does not have to pay corporate income tax but its profits or losses are passed through and recorded as the owner's personal income with pass-through entities income taxes are paid by shareholders or the llc members on their individual tax returns not by the business s corpse versus series llc what you need to know unfortunately the answer to this question is not black and white deciding between forming your new business as an s corp or a series llc can be confusing especially when both options offer similar benefits the choice is ultimately a personal one and will usually hinge on how you want your business to function there will always be pros and cons to any decision so make sure you take your time and consult with an attorney if you need help okay pretty good stuff right thanks for taking time to listen to this article and remember the bigger pockets calculators are powerful tools to help you make sound investing decisions you can get five free reports at biggerpockets.com calc and pro members get unlimited use i'll see you back here in 24 hours or less you

Thanks for your comment Lahoma Pushard, have a nice day.
- Teodoro Harles, Staff Member

in this video i'm going to discuss why passive income such as income from buying and holding rental real estate should not be taxed as an s corporation and if you do this incorrectly and trust me many people do you will actually pay more taxes on that passive income than you should be so if this is your first time watching my name is navi mirage i'm a cpa that helps real estate professionals around the country save thousands of dollars in taxes but that said stick around because this video is really going to apply to almost every business out there so let me just lay the foundation for you so i recently created a video that talks about four reasons when you should not be taxed as an s corporation right and so as a quick recap those reasons were number one you don't make enough profit in your business for the s corporation to make financial sense uh the second reason was you have a w-2 you know job where you earn a high wage and you also have a profitable small business on the side and when you mix those two together it's not favorable to be taxed as an s corporation the third reason was you reside in a city or state that taxes the s corporation and that therefore eliminates the benefits of the s corp and the fourth reason which is the topic for this video is that you participate in passive income activities such as you know rental real estate and therefore that income shouldn't go through an s corporation and so before we dive in here's sort of a quick refresher on like the basics all right to help you understand the contents of this video but i'm telling you stick around especially if you plan on investing in rental real estate because this is something you're going to want to know or need to know so when you have profit from your active income business so when i say active income i mean you're in the day-to-day and this is a business that's operational in nature so you could be that real estate agent that physician or what have you that businesses profits are subject to two types of taxes it's subject to self-employment taxes and it's subject to income taxes at the federal and perhaps state level so the self-employment taxes are paid at a rate of 15.3 percent and your income tax is paid at a rate that you know varies depending on where you fall within the tax brackets okay now if you've been watching my videos you know that you can deploy the s corp strategy to save a bunch of money on the self-employment taxes right and so the s corp strategy really doesn't have anything to do with the income tax right it's all about saving for the self-employment tax and depending on the profits that you have from your you know active business the s corp strategy can save you upwards of ten thousand dollars in taxes each and every year so it's very very powerful here's the problem though there's so many videos and blog articles promoting the s corporation that everyone thinks that their business income should be taxed as an s corporation what they don't tell you in those videos or those blog articles either because they just simply don't know or they forget is that they don't distinguish that the s corporation strategy is for your active income business and i'm going to explain what i keep referring to when i say active and passive here in a second so see what happens is the irs classifies your income as active or passive and so i'm going to transition to the whiteboard here in a moment and explain this a little bit further so if you run an operational business that i sort of alluded to earlier then again your income is subject to the 15.3 percent self-employment tax and so when you're first getting started you could be running that business through what's called a schedule c in your tax return or you could form the s-corporate election to save money in self-employment tax and you'll you know complete the 1120s okay so again this is your real estate agent physician uh amazon fba um yoga studio whatever right operational type business you're in the day-to-day of of the business activity and you'll be subject to this sort of tax right but when you're involved in passive activities such as rental real estate that income is not subject to self-employment taxes so you would avoid paying self-employment taxes to begin with for passive activities right so the mistake that you would make is you'd be putting your rental income over here and subjecting it to self-employment tax and you know you may accidentally put it on schedule c or on the 1120s for your s corporation your passive activity is again not subject to the self-employment taxes so it needs to be on a separate schedule either called a schedule e if you're just investing by yourself that's likely where it's going to go or if you've invested in rental real estate uh with another person then it'll likely go on a partnership tax return um and again avoid the self-employment taxes altogether i shouldn't really even say avoid this the tax because it's not subject to it to begin with right so the point i want to make with this visualization is sort of a hard line here saying your active activity businesses will probably be on schedule c or this s corporation and flow into your individual tax return which is down here your passive activities will either be on schedule e or on this partnership tax return and it's going to flow into your individual tax return down here you notice that this activity isn't on here right the income isn't flowing from here and then into this it's flowing directly into your individual tax return so be careful i hear so many people use the term passive income incorrectly these days and you need to make sure that you use the term properly as it relates to the irs again selling on amazon fba income from youtube or if you're selling a course or something like that these are not passive activities in the eyes of the irs the most common forms of passive income are you know rental real estate which i'm saying you purchase an investment property you're the landlord you have a tenant and you earn that real estate income also other types of passive income would be income from investments such as you know dividends that you earn because you you you hold stock or uh maybe you invested some capital into a business so you're not involved in the day-to-day but because you put that capital in that business you get uh profits from that business each year but again you're not involved in the day-to-day someone else is running the business um so let me just say this if you're watching this video and you're a little bit confused that's okay i understand okay watch my other videos on my channel which dive into these topics further they'll talk about you know what is an llc what's an s corporation why do people form s corporations and that'll give you a better foundation and then you could come back and watch this video again and it will make more sense let me just say this if you didn't catch the four reasons on why you should not be taxed on s corp if you didn't catch that video and you're watching on youtube then i highly recommend watching that video that video should pop up here shortly um i

Thanks exhicyholkili6 your participation is very much appreciated
- Teodoro Harles

About the author

Teodoro Harles

I've studied neurophysics at Iowa State University in Ames and I am an expert in reference management software. I usually feel jealous. My previous job was industrial-organizational psychologist I held this position for 18 years, I love talking about unicycling and thrifting. Huge fan of Liam Payne I practice mountain biking and collect cheese labels.