Posted by Joe (NoVA) on February 03, 2002 at 08:50:33:
Factors to consider:
C Corp:
–Full deductibility of perks such as health insurance
–Completely independent entity for tax purposes; any “dividends” or distributions made by the corporation to you will be taxed twice–once at the corporate level and once at your level. (Solution: don’t pay dividends, and pay yourself a salary instead, which is deductible as an expense. The salary must be “reasonable” for what you do…drawing a $200,000 a year salary would probably not be “reasonable” (depending on the business I guess) and the IRS might reclassify some of that as dividends, forcing you to pay double tax). The more you make, the more double-taxation becomes an issue. I think I have seen some people on here advocate moving to S status once you’ve exhausted the C Corp’s ways of deducting expenses, in order to avoid double taxation when you take excess cash from the corporation.
–You personally cannot claim losses to the corporation, the corp must do that on its own returns. (But if you’re doing things like flipping or rehabs, where you plan carefully for your profits, you may not need to worry about losses the way many businesses do when they’re starting out).
–You can have any fiscal year, which might be important to seasonal businesses, or aggressive accountants…(something about how you plan your income to be more or less in a particular year by having the fiscal year be different from your own calendar fiscal year, but i’ve never really looked into this).
–Income is taxed at a lower tax level for corporations than individuals, at least for the first $50000 (15% I believe). If you are trying to accummulate working capital, or if you are not currently receiving any other income other than from your real estate business, then this could result in a substantial tax savings. You are taxed at your personal rates for any S Corp income.
S corporations
–S Corp income “flows through” to the shareholders, eliminating the need to file separate tax forms for the corporation. However this means the corp income is taxed to you regardless of whether it is distributed as salary to you.
–Since double taxation does not apply, there is the temptation to pay yourself with dividends instead of salary (to avoid other salary taxes). This is somewhat the mirror image problem of taking too much salary from a corp: if you take too much in dividends without paying yourself a “reasonable” salary the IRS could reclassify some of your dividends as salary and force you to pay a tax penalty.
–Since S Corp income flows through the shareholders onto their tax forms, their personal tax rates apply which are generally higher than corporate rates.
–You must have a calendar fiscal year (I think you can obtain special permission from the IRS not to have a calendar year, but it sounds like a hassle).
–Since S Corp income flows through to you the owner, so do losses, and you can claim those on your own tax forms to offset other income you have.
These are the factors I considered before I decided recently to set up a “C” Corp for flipping and rehabbing properties.
I’m pretty certain that corporations are best for flipping, but I’m not sure about lease options. Generally the conventional wisdom is that properties you’re going to hold a while should go in an LLC. I don’t know if that’s true for lease options, and I’d recommend asking on this board that specific question if nobody answers it here.
As for how to incorporate, it is very easy. Every state has an office that deals with corporations (i.e. the State Corporation Commission here in Virginia). You are required to submit Articles of Incorporation (which the state frequently has available for download) along with a fee (usually $50-$100). Once you do that you’ll receive a Certificate of Incorporation. You should then set up bylaws (many samples are found on the net), and you should keep some of the formalities of corporations in case anyone accuses you the corp is a sham (i.e. at least have a shareholders meeting once a year even if you’re the only owner). There are many books on the subject of how to maintain a corporation and picking one up is a very good idea. I found the bylaws for my corporation at www.alllaw.com in the forms section.
If you can’t find your state’s corporation office email me the state you’re in and I will point you to the site. (jbarrios@bellatlantic.net)
J.