LETS PUT THIS THING TO BED ONCE AND FOR ALL!...JPiper, JHyre, David Alexander - Posted by JB in MD

Posted by Bassman on June 02, 2000 at 12:32:39:

Never said you had anything against Jim. Didn’t even imply it. I simply noted that , when Jim shows frustration in his responses, it is because he may be getting tired of answering, re-answering and then beig questioned again on issues that have been explained times over.
As I stated before, this site is wonderful on getting hints as to what to do, yet , any Lawyer will attest ,that its best to get local help when setting things up. No matter who gives great advise here, ultimately, you are responsible for you own actions.
Take what you learn here from these advisors ( not counsel), run it by counsel ( lawyer) and then determine what is best. Sometimes you can update your legal counsel as to something they may have missed , that you learned here. Othertimes they may update you as to changes that pertain to your locality that might not have been needed by an advisor on this board.
Again, use the information here as a outline of what to do, not as written in stone law.
Always always always seek good legal cousel before doing anything.
many a person has taken advise from here , used it without varifying for their locality and been burned, and then seem to want to blame this site and its members for getting them in trouble.


LETS PUT THIS THING TO BED ONCE AND FOR ALL!..JPiper, JHyre, David Alexander - Posted by JB in MD

Posted by JB in MD on June 01, 2000 at 22:55:25:

Hi all,

The replies to the post I made a couple of days ago seemed to get somewhat murky and turned into something from which I could not derive my answer. I was asking what type of entity would be best suited to doing some flips and sandwich L/O’s. Upon doing a search in the archives I came across a post by Sheik which said

“Active income (such as flips and sandwich L/Os) are better done through C-corps (not S). C-corps are taxed at a lower 15% (up to $50K) than an S-corp (which would be taxed at your personal level).”

Now, is he right? What are the other implications that I would need to consider? SS taxes? Self employment taxes?

I know that there are many of us newbies out here who really need you Pros’ advice because I have gotten several private emails asking me to share what I have decided to do! Well, I haven’t decided because I still don’t know! It seems that since an S-corp can’t have passive income (is that what the monthly spread on a L/O is?) that it would be ruled out, aside from being taxed at the higher personal level with nothing else to write off against it. Also the fact that you lose all of your creative deductions because of the 2% ownership rule.

We really need you heavy hitters to weigh in on this - there are far to many confused individuals out here!


Thanks in advance,

Consider this. - Posted by The Baze

Posted by The Baze on June 02, 2000 at 19:31:41:

True, C-corps are taxed at the lower 15% rate on taxable income up to $50,000. Most people I deal w/ are in business to make money AND to use the money that the business makes for their personal living expenses, meaning any profits are distributed to the shareholders. If you set up a C-corp, and your intention is to pay yourself a reasonable salary, and to leave a majority of the profits in the corp as retained earnings, fine. But if you anticipate that you may take most of the earnings out, consider this:

Your ABC, Inc. has $10,000 net income on 12/31/00. Kiss $1,500 goodbye for taxes. So you’ve got $8,500 left over, which you distribute to yourself because you need some smack. If you’re in the 15% tax bracket, that $8,500 dividend will cost you $1,275. So, on the original $10,000, $2,775 has been paid in taxes, or 27.75%. Whereas if it were an S-corp, the distribution would not be taxed twice, and that $10,000 net income would cost you only $1,500 in taxes (assuming adequate basis).

Yes, there are a host of fringe benefits that you can take that are deductible for the corp and excludable from your gross income (health insurance, pensions, etc.) and I highly encourage you to use all that you possiby can. My point is simply that if you intend to take most of the profits out of the company for yourself, an S-corp may be the better choice. If the plan is to pay yourself a salary that you can live on and leave most of the profits in the corp, then C-corp is the answer.

Just my .02.

Tom Bazley

One more thing - Posted by Bud Branstetter

Posted by Bud Branstetter on June 02, 2000 at 16:43:44:

Hopefully you got your answer and are starting with the C corp. Along with the tax situation the protection you get when signing a contract is worth it. It is a layer of protection. You also heard that LLC used as a partnership not corporation is the way to go for holding long term properties. That C corp separates what would be dealer properties from those you hold long term.

Sooner or later you will want to say that one of those lease options to want to treat as long term so that you can get favorable capital gains treatment. That is when you want to assign that contract and take title in the LLC. You could do it to your name personally but then you have no protection. You will find some of those L/O(more than you think) will just give you the deed. The interest rate may be good and you want to sell on a wrap(ala cash cow). That is when you do not use the corp. You may option it or rent it for a year or two before selling. There is cash flow but not much equity worth cashing out. Things like VA and 97% FHA loans can be in that category. Last comment-don’t let establishing an entity keep you from going out and doing the deal.

A Corp, S OR C for flips… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on June 02, 2000 at 06:17:09:

First, your answer requires a huge post (larger than I’m willing to make) to truly answer all of your questions. Your answer would also require a very detailed knowledge of your business and personal situation…and by detailed I mean numbers for this year and projected figures for future years.

As a RULE OF THUMB, I agree with Bronchick…C or S-corp fo MOST active businesses. Whether to use a C or S depends largely on the amount of after-tax income your entity is making. This, in turn, is a function of the gross income your business produces and the taxable deductions that you are able to RATIONALLY create. I say “rationally” because you can always create deductions by spending more…but spending a dollar to save a $.31 is NOT rational…so I’m talking sustainable, reasonable deductions. If your income generation exceeds your ability to create rational deductions by $50,000 to $100,000, you may consider an S-election, because you are losing the advantage of the low C-corp brackets. The exact threshhold to make this call is EXTREMELY fact sensitive…depends on what “rational” is, future expectations and your personal income stats.

Closely-held C-corps cannot have more than 60% passive income withour risk of incurring nasty consequences…I don’t see why S-corps cannot have passive income. The C-corp does get a few deductions that other entities do not…but again, if the taxable income is large enough to use those deductions AND exceed the various C-corp brackets, S may be better on the whole…for most SMALL businesses, C is the better initial choice, with the possibility of conversion when TAXABLE income exceeds at least $50,000.

Bottom line: Sheik and Piper are right GENERALLY, but the details matter very much in choosing an entity.

John Hyre

What Part of C-Corp Didn’t You Understand??? - Posted by JPiper

Posted by JPiper on June 02, 2000 at 02:11:00:

That was my answer two days ago…and it hasn’t changed today. You can scroll down and still read the answer!!

Murky??? I don’t think so. Maybe you and other newbies just don’t know how to read. But in case you’re actually interested in reading, go read “Maximizing Profit and Limiting Liability in Real Estate”…it’s a How To Article by Bill Bronchick.

Next time you ask this question, DON’T PUT MY NAME IN IT. This time I just don’t think you know how to read. Next time you’ll confirm you’re dumb!

C-Corp for Flips. C-Corp for flips.


C Corp does not pay SS Taxes or Self Employment taxes - Posted by Soraya(SanDiego)

Posted by Soraya(SanDiego) on June 02, 2000 at 01:03:43:

“Active income (such as flips and sandwich L/Os) are better done through C-corps (not S). C-corps are taxed at a lower 15% (up to $50K) than an S-corp (which would be taxed at your personal level).”


Now, is he right? What are the other implications that I would need to consider? SS taxes? Self employment taxes?

The C Corp does not pay SS Taxes or Self Employment taxes

However, you personally have SS taxes when you take a salary from the corp.

I am99% sure that an officer or director of a corp has to be paid a salary as an employee and can not be “1099ed” as an independent contractor (therefoe you would not have self employment taxes.)

You may want to verify the 1099 possibility with Attorney William Bronchick at www.legawiz.com


Re: LETS PUT THIS THING TO BED ONCE AND FOR ALL!..JPiper, JHyre, David Alexander - Posted by SCook85

Posted by SCook85 on June 01, 2000 at 23:51:07:

There is no one answer to your question. Many factors come into play. If you know what you are doing and are always keeping up with what you have and what you don’t a C-corp could work very well. If you just make a lot of money and don’t spend it a C-corp could hurt you.
Getting started most accountants would recommend that you don’t go with a C-corp and they have good reasons for this.
Just remember that which ever way you decide to go, you can always change it to suit your needs as you begin to understand what they are.


Re: A Corp, S OR C for flips… - Posted by David(Ca)

Posted by David(Ca) on June 02, 2000 at 09:22:31:

My C corp manages my properties. Collects rents, pays bills, etc. and collects 15% of the rents as a managment fee. Expenses are about equal to the income…net zero income for the year.

Could this somehow be interpreted as a passive activity?

Thanks in advance, Dave.

Re: A Corp, S OR C for flips… - Posted by JB in MD

Posted by JB in MD on June 02, 2000 at 06:30:46:


Thanks very much for the post. Please see my post below under Steve Cook. I just decided to do exactly what you said to. Thanks for giving the definitive answer I was looking for, although you may not have known that you gave it. I just realized below, that I am not sure whether or not the first year will bring $50k, so I decided to start with a C-corp.

I sincerely appreciate your reply. Coming to this decision has really been weighing on me, and today was my deadline for making the choice.

Jason Bertok

Re: What Part of C-Corp Didn’t You Understand??? - Posted by JB in MD

Posted by JB in MD on June 02, 2000 at 06:55:03:

I meant you no offense by saying the end of that thread got murky. It had nothing to do with you personally, I just felt it got off track, and I wasn’t able to derive what I needed from it. Sometimes they go that way. No problem. That was not directed at you in any way. I needed more of an answer than I got from anyone. You stated that you didn’t know about S-corps and if you were to do one you would rather it be an LLC. OK, but the specific questions I referenced indicated that I was ruling out a LLC so that left me with C or S. I was looking to those of you that are much more experienced to weigh in on the issue because, as I said a little ways down this thread, Bronchick’s material is good, but he cannot tell you exactly what to do without knowing your situation exactly. That is why I posted my situation. I intend to set this thing up correctly from the beginning. Therefore, I reposted, trying to get a more definitive answer, and it has worked. I included your name simply because you had taken the time to post the last time around, and I wanted to draw your attention to the fact that I was still unsure as to which way to go. That is why the other two gentlemen’s names are listed along with yours.
Regardless of the fact that you have verbally bashed me, I still very much respect your opinions no matter how you express them.


Jason Bertok

One more question to Mr Piper - Posted by Bill L

Posted by Bill L on June 02, 2000 at 02:31:35:

Hey Jim don’t be so harsh on dumb people!

Thanks for the info>

What would I use an LLC for?

Bill L

C Corp DOES pay SS Taxes - Posted by Glenn-OH

Posted by Glenn-OH on June 02, 2000 at 06:50:10:

As an employee of a C corp (same as all of the big companies out there) you pay half of SS tax, corporation pays other half (approximate). S corp pays self employment tax for income taken as salary.

Re: C Corp All the Way! - Posted by Lori Samson

Posted by Lori Samson on June 02, 2000 at 01:40:27:

If you are doing L/O you need a C corp. Yes you do have to draw a salary and you are subject to matching witholding. If you have a LP with the corp being the general partner you save tons in taxes and don’t have all the matching witholdings.Then do as much as possible through your business to use pretaxed dollars i.e. car, clothing allowance, trips, housing, food, etc,etc,etc, (I just watched The King and I!) Lori

Re: LETS PUT THIS THING TO BED ONCE AND FOR ALL!..JPiper, JHyre, David Alexander - Posted by JB in MD

Posted by JB in MD on June 02, 2000 at 06:24:26:


Thanks for your reply. It is difficult being the new guy and not knowing definitively which direction to travel. I have read Bronchick’s article, but I feel he doesn’t come right out and choose C or S. With good reason, though. I understand he could be liable for the advice he gives, and he doesn’t fully know your situation, either. That is the one question I needed answered, though, and I felt like I didn’t get it previously, and obviously others didn’t get it either. Maybe we all are dumb or just can’t read. Or, maybe we all are just looking for some definitive guidance. My position is that I want to set this thing up correctly the first time. I have made myself a deadline by which I had to have my mind made up, and that is today. I have my paperwork together, and after the pains that we have all experienced in getting through these threads, I believe I will go with a C-corp. I really like the idea of the simpler set up of the S-corp, but I don’t so much like the idea of being taxed at my normal personal rate. I also don’t really like the additional taxes that C-corps pay, but I do like the fact that the first $50K is only taxed at 15%. I am not sure I could make $50k in the first year, so at least for now that may be my better bet. The other big benefit would be the fringe benefits, although I won’t have the good ones like health insurance or an automobile.

Thanks for pointing out that the entity can be changed once I know what I am doing. That is a good thing to know, because I don’t yet know what I am doing!


Nope, true management is active as it gets (nt) - Posted by JHyre in Ohio

Posted by JHyre in Ohio on June 02, 2000 at 09:47:54:


Caveat… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on June 02, 2000 at 06:45:06:

that probably doesn’t apply to you: I said most small active businesses should start as C-corp…not quite true. Most active small businesses produce losses- THEY should start as S-corp. Most of the active REAL ESTATE businesses discussed on this site produce gains…THEY should start as C-corps, as a rule of thumb!

John Hyre

Re: What Part of C-Corp Didn’t You Understand??? - Posted by JPiper

Posted by JPiper on June 02, 2000 at 12:37:53:

Hi JB:

First I?d like to compliment you on the fact that you have handled yourself quite well in light of my verbal bashing last night. That says a lot about you. For my part I was feeling pretty frustrated last night to see the same question asked by you, with my name in it, that I had answered a couple of days prior. I don?t mean that as an excuse, but simply an explanation of where my post came from. I would like to think that I try to handle myself according to a high standard, but unfortunately at times my frustrations get the best of me. You on the other hand maintained a high standard, didn?t permit my frustration to cause you to react, and if you can maintain that trait in all your activities it will serve you well.

In another vein, I recall the words of Mark Twain. I think they go like this: ?Life is the process of drawing without an eraser.?

I mention these words because what I have found in my business career is that I am required to make decisions daily where I unfortunately do not have full and complete information with which to make the decision. I don?t believe I?m unique in that?.I think we?re all at that level at all times.

This comes into play as an example when I acquire a property. Sometimes my idea with a property is that I will flip, and therefore I take title in my corporation. Later, I may find that my view changed, that I don?t really want to flip now?..and now I have the property in the wrong entity entirely. Oops. My CPA gets a good chuckle out of all of this, and of course we go from there and figure out the next gameplan the best we can.

Without wishing to sound arrogant, I think I have developed a significant amount of knowledge over the years regarding a number of different aspects of this business. Most of it was developed through my errors, that is, decisions based on incomplete information at the time which then caused me to have to work through a problem of some type.

The point here is that you won?t ever have complete information on anything in this business. If you think you do, you better look around, because there is undoubtedly something you didn?t think about or overlooked. Nevertheless, you must make a decision?.because trying to develop that elusive complete information will simply lead to indecisiveness?..a trait that won?t work well in this business, or probably any other business. And once the decision is made, life becomes a ?process of drawing without an eraser.?

In this case, as others have already stated, when you incorporate you have an opportunity to designate ?S?. You can designate in the future as well IF at that time you find your circumstances warrant it. But truly there are a myriad of factors that could go into this decision, and then there are unknowns?.like what will the makeup of your business be, and what are the other sources of income available to you. Further, a C Corp is not designed to be a ?be-all-end-all? solution. Rental property as an example would be better held in an LLC. An LLC has an option of being taxed as a corporation rather than as a partnership, which might well be a good design for flipping activities and would carry superior asset protection features to an S Corp. However, a good first move is the C Corp. You?ll figure the rest out as you go along, and circumstances develop themselves, and a picture of your business starts to evolve.

As was mentioned, good advisors are imperative?.advisors that are acquainted with your personal circumstances. I talk with my CPA all the time?.probably at least weekly, and sometimes more often. I talk to my attorney frequently as well?.and have bills with both people to match.

Again, thanks for the high level of your posts, and good luck with your new corporation.


Re: What Part of C-Corp Didn’t You Understand??? - Posted by Bassman

Posted by Bassman on June 02, 2000 at 09:17:00:

I think the point here is ,dont ask a question and then presume to call the helper murky. My suggestion would be this… ASK a local CPA or financial planner.
You should be putting one on your team anyway. Along with a good Lawyer, and other Professionals in their field.And make sure they know Real Estate laws.
Better to have someone that is versed in what your talking about, then to presume that free advise from anywhere will definatley pertain to your Stae or situation.Some state laws differ , which may hinder your efforts.
Jim is an excellent rehabber, investor and businessman, but I am sure he will tell you , it helps to have people that do it everyday and constantly keep up with new laws, then to try to understand it yourself.
He and the others have given great advise aimed at Helping you. It is not their job to hold your hand and Tell you which entity to use, thats your decision. From an earlier response to someone , you indicated your were pretty much wanting someone to tell you which entity to use. Isnt going to happen. If someone here were to direct you, then you took the advise and screwed it up, they could be held liable for giving you Bad advise or worse for giving legal advise without a license .
Seek out those that you can put on your TEAM , and pay them accordingly for their professioanlism.
This site is great for good general advise, but in the long run , always always always seek out local , qualified professionals in each field . It will save you tons of money in the end .
Hope this helps.


Re: One more question to Mr Piper - Posted by JPiper

Posted by JPiper on June 02, 2000 at 02:43:06:

I would use an LLC to hold rental property…it provides protection while flowing through the rental income to the members tax return.