Corp Vs LLC...more complex scenario - Posted by Sheik

Posted by JHyre in Ohio on April 12, 1999 at 15:53:49:


I have a non-local advisor because I have to. No one in this state- or anyone outside of DC, NY or LA- is likely to answer the kinds of questions I field with the speed I need.

All things being equal, take the local guy. You can get an easier “feel” for who they are and don’t incur commuting costs for audits and the like. However, things are rarely equal. An excellent advisor far away beats a good or average one close by, especially given modern technology.

John Hyre

Corp Vs LLC…more complex scenario - Posted by Sheik

Posted by Sheik on April 08, 1999 at 08:22:11:

I am, of course, trying to figure which of the above is best for me…could do with some help. I have Bronchicks Corp course but not the LLC one.

The consensus here is that a C corp is best for flips (short term gain) and an LLC is best for holding. I am questioning whether this is actually so…at least for my state (NY).

We all know that a corp is an excellent entity if the investor wishes to reinvest profits (which most of us will opt for). The investor will only take a 15% hit on net profits. Also a corp has other fringe benefits, such as, health insurace, retirement plan, as well as other perks.

BUT… here in NY, a corp has to pay franchise tax of 9% of net income or a minimum of $325 per year. That minimum has to be paid whether the corp makes a profit or not.

Given that fact, it seems that the bottom line is that the corp will have to pay 15%+9% = 24% tax on net profits up to $50K. That’s only 4% lower than the 28% the investor would have to pay if he/she had an LLC which would be simpler to maintain.

Granted, the LLC may not come with all the fringe benefits that a corp has. But wait. Here in NY, an LLC owner can opt for his/her LLC to be treated as a corp for tax purposes by filing a particular form with the IRS, and as such, can get all the benefits that a corp usually gets. By doing this, the LLC will not only get all the health insurace, retirement benefits, etc., that a corp usually gets but will also pay tax at the corp’s 15% rate. I am not sure about whether the LLC in this scenario will also have to pay the 9% franchise tax. I would guess that this would be true.

Given This fact, would it not be better to form an LLC (simpler) and then decide (year to year) whether we want to be taxed as a corp vs LLC??

This way we get the benefits of a corp without the complications.

Whew!! I sure hope this makes sense!

Your thoughts??


Good Question - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 08, 1999 at 10:57:11:


Choice of entity discussion tends to focus on federal taxation b/c it’s the largest bite. More often that not, the “best” entity for federal tax purposes is also “best” for state purposes because state rules tend to mimic the federal laws, so the total state and federal rates are higher than just the federal rate but proportionally similar. There are of course exceptions, depending on the state.

Most states have a franchise tax (not always called a “franchise” tax) that taxes a corp based on its net capital, with a minimum fee often applying. Partnerships and LLCs traditionally did not pay franchise tax. That is changing. States often apply the franchise tax to LLC’s treated as corps and some states are looking at applying that tax to all businesses, regardless of form.

Most states impose some sort of income tax (not always called an “income” tax) on corps and, as with the franchise tax, these income taxes are increasingly being applied to LLCs taxable as corps or to all types of business entities.

The bottom line- corp to LLC comparison depends on your state (and locality for that matter). I have not looked up NY’s laws, so I cannot tell you how the various types of LLCs are treated in comparison to corps. Bronchick is from there, so he may know.

John Hyre

Re: Good Question - Posted by Brandi_TX

Posted by Brandi_TX on April 08, 1999 at 12:13:41:

Understanding that I need to find a GOOD CPA, I have been trying to do just that. Unfortunately, the one’s I have spoken to locally don’t seem to be able to break things down far enough for me. We both get confused looks on our faces. Mine because they are speaking Greek, and their’s because I am sure I don’t have all the terminology down, and they don’t understand me. I am at a loss for what I am supposed to be asking them.

In my prior meetings with these folks, I started by stating that I am doing Real Estate investing and would like to incorporate. I then proceed to ask them what I need to take into consideration in deciding on a C or S corp based on my own personal circumstances.

The first lady I spoke with stopped me in my tracks and started to tell me all about why I would be a Personal Holding Co. When I explained that these would not be held for rentals, she flat out told me I don’t need or want to incorporate for that.

My second experience was a bit more confusing to me. So confusing, in fact, that I honestly could not tell you what the gentleman said. I know he too went into the PHC bit, but after that he lost me. When I asked questions to clarify - he lost me even more… LOL Needless to say, I left him with a HUGE headache, knowing less than I did when I went in.

I didn’t even get a chance to go into what I wanted to know about putting $ in and taking $ out of the corp. OR asking questions to see how aggressive they were.

Any advice on a better approach to finding a GOOD CPA would be most appreciated.


Wow… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on April 08, 1999 at 12:54:30:

sometimes people in my (or any profession) can be especially dense. Lots of brains, little sense & they don’t speak English. Dunno what to tell ya. Finding ANY good help- MD, car mechanic, tax advisor- seems to involve art & luck more than science & method. Word of mouth is by far the best reference. This may be like my current search for motivated sellers- be persistent and keep plugging 'til you find one. Bear in mind that tax advisors can and do practice regardless of location. If you find a good one that’s not in your area, no big deal given modern technology. However, some people are uncomfortable with lack of face to face contact. Personally, I deal with it. I have no idea what most of my back-up tax advisors look like & have seen none of them more than twice, max.

John Hyre

Funny you brought that up. - Posted by Brandi_TX

Posted by Brandi_TX on April 08, 1999 at 14:54:21:

I just spoke to an out of state friend that has 8
S-corps in TX. He told me his CPA was in OKC, OK. He also mentioned that in his opinion there were reasons that it is BETTER to use someone that is not local. I will be speaking with him and his CPA later today. I am curious as to your thoughts on the benefits of a non-local advisor.