Partnership or LLC - Posted by JLM


#1

Posted by Pete on November 05, 1998 at 19:13:11:

THANK YOU so much for all your insightful help!!!


#2

Partnership or LLC - Posted by JLM

Posted by JLM on November 01, 1998 at 24:53:44:

I have purchased two properties in the past 6 months. One to live in and one as rental. Would like to buy more, but cash wise I am tapped out. Me and 3 of my friends are going to pull our resources together in order to buy more properties. My question is should we buy properties as a partnership or form a corporation? Should we buy the first couple as a partnership and then form a corp? If we form a corp. at the start, how does this work as far as lenders go because we will not have any track record. Or does it matter because we will still be getting loans together even though it is a corp. I may not be wording this question in the right way, but I am not sure how we should set this up. Any advise would be appreciated.

Thanks,

JLM


#3

Re: Partnership or LLC - Posted by Harvey Carroll, Jr.

Posted by Harvey Carroll, Jr. on November 01, 1998 at 19:21:19:

I have found that LLC are propably the best way to go. They protect you from partners problems and are simular to an S Corp… They now have a single tax rate which is an advantage. Email me in a couple of days and I will write from a handout I have laying around somewhere…


#4

Re: Partnership or LLC - Posted by Pete

Posted by Pete on November 03, 1998 at 20:17:57:

Hi,

Well I was thinking of going the LLC route, but some states require two members…this is s a problem because it’s just me. Is there ant way to get arounf this problem? Thanks.


#5

Re: Partnership or LLC - Posted by J. Hyre in Ohio

Posted by J. Hyre in Ohio on November 02, 1998 at 07:01:00:

Whether to form an llc or a corporation depends largely on your tax position. If you already have high taxable income (e.g.- you make at least $40,000 after deuctions plus and are single or are married and make $90,000 plus after deductions) and intend to reinvest the gain on your deals in making more deals, a corporation is better if the deals produce less than $50,000 per year because of the 15% corporate tax and compounding. You are otherwise better off with an LLC.


#6

Re: Partnership or LLC - Posted by J. Hyre in Ohio

Posted by J. Hyre in Ohio on November 04, 1998 at 07:28:18:

Re: 2 person LLC:

Create a corporation and have it act as the second member of the LLC or create an LLC in a “one-person” jurisdiction and operate it in your state. Your state should accept the out of state one- person LLC under the “Full Faith & Credit” clause of the U.S. Constitution.


#7

Re: Partnership or LLC - Posted by David(Ca)

Posted by David(Ca) on November 04, 1998 at 12:22:23:

J. Hyre,

I just noticed several of your posts for the first time.

I find them high quality and very insightful, hope you keep it up.

Dave


#8

Re: Partnership or LLC - Posted by J.Hyre in Ohio

Posted by J.Hyre in Ohio on November 05, 1998 at 11:58:25:

I was thinking a bit more about your situation. While W. Bronchick generally advises one to use a corporation to minimize self-employment tax on Dealer properties, I think your situation may be different. Because you already make $70k, you have maxed out on social security taxes because the maximum amount of salary subject to those taxes is $68,400 for 1998. While an LLC could normally subject its owners to social security taxes, they are not on the hook to the extent of social security taxes already paid. Therefore, if your $70k of income is already subject to social security taxes, using an LLC will not subject you to further such taxes.

In short, if you are paying social security taxes on the $70k, use an LLC for for flipping if you intend to immediately take your profit. If you intend to use your profits from flipping to finance further flipping (Say THAT 10 times as fast as you can!), use a corporation (you still will owe no social security taxes) so that your reinvested money is only taxed at 15% until distributed to you in the form of dividends. If the flipping corporation begins to make more than $50,000 per year, you may need to conduct any remaining flipping business outside of teh corporation to avoid higher corporate tax rates.


#9

Re: Partnership or LLC - Confused! - Posted by Pete

Posted by Pete on November 04, 1998 at 16:57:11:

Help! I see a lot of info pros and cons for S-Corp vs
LLC. What is best for me??

  • One person comapny

  • approximately 10 rentals

  • my personal income about $70k

  • income from rentals under $50k

  • my goal is to expand…buy more/hold/sell/L/O, etc.

  • I heard that Nevada is best state to setup
    All answers from the experts are really welcomed
    Thanks.


#10

Re: Partnership or LLC - Confused! - Posted by JHyre in Ohio

Posted by JHyre in Ohio on November 05, 1998 at 11:14:24:

Check out Mr. Bronchicks Article re Maximizing Profits and Limiting Liabiity in Legal Corner on this website. It contains good advice.
In that article, W.B. mentions that an LLC owner may be tagged as a dealer if the LLC flips properties. I would therefore put a flipping business in a corp and pay yourself a minimal salary, while putting the investment side of the business in an LLC.


#11

Re: Partnership or LLC - Confused! - Posted by J.Hyre in Ohio

Posted by J.Hyre in Ohio on November 05, 1998 at 07:42:11:

S-Corps and LLC’s offer very similar benefits in that both confer limited liability and avoid double taxation. In your shoes I would shoot for an LLC because:

  1. With an S-Corp, you must pay yourself a salary. This salary is subject to 15% Social Security tax in addition to all other taxes. The IRS is MUCH less aggressive in forcing LLCs to pay its stakeholders a salary.
  2. If you use debt financing, the LLC provides more flexibility.
  3. The LLC is also more flexible if you want partners in the future.
  4. Contributing property or money to an LLC is slightly easier than with an S-Corp.
  5. I STRONGLY reccomend separate companies for flipping and holding properties. If you flip properties, you are a DEALER for IRS purposes, which has a number of very nasty tax consequences, including higher tax rates. Thus, it literally pays to segregate investment propeties from flipped properties lest the investment propeties be treated as DEALER property.
  6. As you expand the investment side of the business, you may wish to establish additional LLC’s for every ten or so proprties acquired. It is much cheaper tax-wise to sell an LLC with property in it than to sell the property itself. Dividing your property in such a manner allows you the flexibility to sell some property to a buyer who does not want ALL of your property.

I have HEARD that NV is a good place to set things up, especially if you are from the Peoples Republic, err, State of California. However, I DO NOT have first-hand experience with Nevada law.

P.S.- An LLC MUST have 2 members to be treated as a partnership for tax purposes. One member LLC’s are IGNORED by the IRS and you would have to file taxes via Schedule C of your 1040. Schedule C is NOT a good way to go.

P.P.S. A partnership is an LLC without limited liability. Since 2+ member LLC’s are treated as partnerships for tax purposes, I can think of no good reason to EVER use a partnership instead of an LLC.