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Corporation vs LLC for Real Estate Investors - YouTube
Channel: Clint Coons Esq. | Real Estate Asset Protection
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- Hi, Clint Coons here with
Anderson Business Advisors.
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And in this video,
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I'm going to discuss the
difference between using
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a corporation versus a
limited liability company
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for real estate investing.
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All right, so this comes up a lot.
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You know, should you
create a corp or a LLC.
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Most of you, if you're
watching this video,
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are probably thinking you need
a limited liability company.
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And I see it all the time
when I run into new investors,
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I ask them, "What kind of
entity did you create?"
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"Oh, I created an LLC."
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Why?
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"Well, everybody's doing
it, why wouldn't you?
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I was told from my local practitioner
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I need an LLC for asset protection,"
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or "I went to RIA meeting and I was told
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I need to create a limited
liability company."
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Okay, LLCs are great.
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Don't get me wrong.
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We use them exclusively for holding assets
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such as rental real estate
or flipping property.
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But it doesn't necessarily mean
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they're always the best entity of choice
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for real estate investing,
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because at the end of the day you
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really have to understand what is it
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that you're trying to accomplish.
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If you're setting up an LLC,
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it's more than just setting up the LLC.
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How's it going to be set up?
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Is it member managed
versus manager managed?
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Do you want anonymity?
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Or is anonymity not important to you?
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Have you made an investment in
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getting real estate education?
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Would you like to make sure that
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you can write off that entire investment?
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That's important.
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What state do we set it up in?
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So these are many of the
questions that come up
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over and over again when I'm teaching
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my asset protection workshop.
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People will be in there and I'll ask,
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I'll say, "Did anybody
here create an LLC?"
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And a bunch of hands will go up.
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And I'll say, "Alright, what
type of LLC did you set up?"
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People just stare at you.
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Then they'll go, "Well it's an LLC."
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Not realizing there are different forms of
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limited liability companies
that have different purposes.
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So, should you use a corporation
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or a limited liability company
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for your real estate investing?
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Well, what I'm going to determine
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when we're setting up this structure,
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what we want to look
at for your investing,
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is what type of investing
are we engaging in.
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So, if you're going to engage in
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buy and hold investing then obviously yes,
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we're going to an LLC for
our buy and hold investing.
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Now the reason we're using the LLC is
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because what we want is
flow through tax treatment.
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That's what you can get with
a limited liability company,
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cause you can elect to have it treated as
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a disregarded entity, a
partnership, or an S corporation.
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That's flow through treatment.
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Now, for many individuals what
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we're going to elect with these LLCs,
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is we're going to choose
either partnership
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if there's more than one owner.
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Or we're going to choose disregarded,
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if there's just one owner in the LLC.
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And not necessarily S
corporation tax status.
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And I'm not going to
go into that right now,
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because it's beyond this video,
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but the point is for buy and hold
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we'll definitely do an LLC.
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That makes sense for those individuals.
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Now, if you're going to
invest in tax liens or deeds,
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same thing, you can do that
through an LLC as well.
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So tax liens and deeds,
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we can use a limited liability company.
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And again, we're going to be looking
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typically for flow through treatment.
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Flow through tax status on that LLC.
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Now we're setting 'em up,
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you may want to either set
'em up as member managed,
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manager managed, dependent
on if you want anonymity.
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And again, that's a different video.
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So, how about if you're flipping?
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Okay, flipping property.
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So buying rehab.
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Well in this case,
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we're going to often times
do an LLC or a corporation.
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Alright now, here's what's
key to understand here.
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Should you use an LLC or a corp?
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Well, flipping, what I'm
concerned about is the tax status.
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I don't want you to be tagged
as a dealer in real estate,
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so to avoid dealer status,
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we need to set this up as either an S corp
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or a C corp to avoid dealer status.
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Cause if you get tagged as a dealer,
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cause if you wholesale
property or flip property,
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then there a number of negative
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tax ramifications that come from that.
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Now if you just set up an LLC that's
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a flow through partnership or disregarded,
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you're a sole proprietor,
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it's going to blow you up
at the end of the year.
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So we want to minimize that.
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So we can do an LLC
taxed as C or an S corp,
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and that would work fine,
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or we can do a corporation
taxed as C or an S corp.
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So which one am I going to choose?
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Well, the question I'm
going to ask you is,
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"Did you incur a bunch of expenses
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to get to where you are today?"
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I work with a lot of people that
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come to our workshops
that have been through
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various real estate trainings,
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where they maybe dropped down
10, 20, 30 thousand dollars.
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And I know you want to be
able to write that off.
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So if you want to be able to ensure
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that you've covered every way
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in which you can deduct that expense,
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then you're going to want to go
with a traditional corporation.
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And the reason why you're
going to want to do that,
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is for what's referred to as
1244 stock loss treatment.
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Stock loss because that is only
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available to a corp, S or C.
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And what it means, is this.
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That should you find that real estate
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investing isn't working out for you,
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or things happen in your
life and you have to quit.
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Any monies that you
invested into this company,
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and namely the investment
you made to learn
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how to invest in real estate is
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something that I would
attribute to that company,
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you can then deduct that
on your 1040 in the year
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in which you shut down your company,
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if you made this election.
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And you have to make it at the beginning.
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You cannot make this election later on.
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It has to be made when
you formed your company.
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So 1244 stock loss treatment
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is only available to corporations,
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and it gives you an additional out.
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If you're making money in real estate,
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you can write it all off the expense
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through the company itself,
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on an LLC taxes in S or C corp,
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or a traditional corporation
with that election.
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But, if you decide that, "Hey,
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real estate investing is not for me."
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And you still want to
capture those expenses,
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then I would go with the corporation,
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and not the LLC for my flipping activity.
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Because with the LLC,
when you shut it down,
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any of the investments
that you've made in there,
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that you've not recouped,
then you can write those off.
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But if you don't have
the right type of income,
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you're going to carry it forwards,
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and you're only going to
be deducting $3,000 a year.
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I ran into someone who had
$50,000 when he called us up,
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and luckily we'd created
a corporation for them,
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and their CPA didn't understand
this 1244 stock loss.
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And so, the guy that
called us up and said,
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"Listen, he's writing off $3,000 a year,
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I'll be dead before I
capture all of this."
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I said, "No problem, we'll
just amend your return,
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we'll pick up the 1244,
which should have been done,
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cause we set it up for you,
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at the outset, with that in mind."
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So when it comes to investing in
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real estate corporations versus LLC's,
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what we're really focusing
on is the structure
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depending on if you have
investments into that company
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you want to be able to
recoup at a later date,
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at high expenses, to get it started.
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We're also looking at tax status.
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Okay, so, what's really important here
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is you make the proper
tax election for the LLC
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that corresponds to the type of
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activity that you're engaging in.
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So we've got tax liens
and deeds, buy and holds,
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I said flipping, I'd also
do wholesaling down here
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under the corporation tax status.
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Again, cause it's an active business.
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If you're investing in syndications,
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I would put syndications,
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typically they're going to be
in a limited liability company,
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because that's flow through tax status.
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That's the treatment we want.
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We want any gains or losses flowing
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down onto our 1040 Schedule E.
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So we'll drop that into there.
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You can take it from here.
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I mean, if you're doing apartments,
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if you're going to engage in self-storage,
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all of those things that you intend
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to hold more than a year, for long-terms,
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then we're definitely looking at
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the limited liability company.
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But when it comes to an active business,
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Bringing about they're doing
things on an active basis,
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then we're going to go more
towards the corporation.
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Now that's just high overview stuff,
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because another layer that we're not
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going to be getting into is that if you
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have partners in your business.
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If you have partners that
you're bringing into your
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active flipping business,
or managing syndications,
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promoting business, then we
have to look a little deeper,
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and then make a
determination as what we need
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to ensure that there aren't
any violated expectations,
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and everybody interest is protected.
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And so then, we may flop
back over to the LLC realm.
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What I mean by all of this
at the end of the day,
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it's not a one size fits all approach.
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What you really need to do
is have a strategy session.
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At the end of this video,
you'll find there's a link,
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you click on that, you can set up a free
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strategy session with one of our advisors
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that will analyze this for
you and give you a roadmap.
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And there's no charge for it.
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And you'll figure out what is a proper
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structure for what it is you're doing.
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And more importantly, they're going to
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tell you where you should set it up.
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Because I know that's a
question that comes up a lot.
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Should it be in Nevada, Wyoming, Delaware,
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or should it be in my own
home state, where I live?
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So with that, thank you
for watching this video.
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Look forward to seeing you at one of
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my upcoming tax and asset
protection workshops.
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(joyful music)
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