Corporation vs LLC for Real Estate Investors

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

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