choice of entity

I get this question a lot from people looking to form LLCs, especially when there’s just a single owner, or only 1-2 owners. There are some neat things you can do with a manager-managed LLC … if you know the tricks!

If you’ve talked to Diane or I in the past year about choice of entity, we’ve probably told you about our favorite combination, the LLC taxed as an S Corporation. But what about those of you who already have a business? Do you change it, or do you start over? And what are the tax consequences of making a switch? A new letter ruling just released by the IRS offers good news!

One of the most misunderstood loopholes for income splitting is by the use of a C corporation.

C corporations are completely different from LLCs, S Corporations, Sole Proprietorships and Limited Partnerships. The biggest difference is in how they’re taxed. C Corporations file their own taxes. As an owner, you don’t get a K-1 that flows income through to your personal return. The corporation pays taxes at its own level.

I came across this awhile ago - people taking title to real estate in the name of an S Corporation, and then trying to get around the “due on sale” clause at a later date by simply transferring the shares of the S Corporation to a new owner. It’s the same game as the Land Trust - where the property title stays static, while the property owners change behind the scenes.

But in this case, my first thought was “Why would you want to compromise your asset protection strategy?”

If you’ve got a lot of different activities going on, it’s often better to use multiple business structures, to take advantage of differing tax benefits. This advice applies to those of you working in real estate especially. You already know that not every investment is the same. Sometimes you pick up a property with the intention of turning it around fairly quickly, while other times you invest in a property with the intent of hanging onto it for several years.

From a tax perspective, both of those goals can be accomplished - but not in the same business structure.

Several years ago, when I was just learning the ropes of the U.S. asset protection system the idea of using Limited Partnerships for families was hot. People loved them for three major reasons:

(a) Absolute General Partner control was firmly established by caselaw
(b) Tax-saving advantages
(c) Easy transfer of assets to the next generation

There was also a massive marketing push towards getting people into “family” limited partnerships. But a lot of things have changed since then. Is an FLP still a good choice?

In my last post I talked about when it can be appropriate to have a single business structure wearing multiple hats. Today I want to talk about how the same applies to LLCs.

A typical new client call often begins with something like: “I’ve got seven homes, two owned outright, and more than 50% equity in each of the others. Can I put them all in one LLC?”