Texas Lawyers, care to help? LLC or Sub-S?

I'm an attorney and I opted for an LLC for my own real estate business. That decision was based in part on the counsel I received from my CPA. Whatever you do make sure you follow through with all of the formalities of formation and operation or you're going to have a lawyer attempting to pierce the veil and get at your personal assets.

 

For liability purposes, first form a LLC, not a corp.

For tax purposes, a LLC and elect partnership or S corp taxation (and C corp). Major disadvantage of S Corp is distributions of property to the shareholder can trigger gain. This is why partnership taxation is better for real estate.

Another disadvantage to S corps is you can't do special allocations. But this doesn't matter if you only have one owner.

Some claim S corps have the advantage over LLCs when it comes to avoiding payroll taxes. This is not true. You do the same thing with a LLC.

Hope this helps.

Edit: Under no circumstances should you have a single member LLC that is not an S corp. Single member LLCs report on a Schedule C, which is the same as a kick me sign for the IRS. If you have a husband and wife, just make each one a partner and you have a partnership.

Edit2: You're not my client. I'm not your CPA. Blah, blah, blah.

 

There are two issuers here: liability limitation and taxes. Both entities will give you liability protection for the acts of others but not your own acts, including negligent supervision. So ask yourself why are you setting up an entity for liability protection? You are probably achieving nothing here.

Which gets us to taxes. LLC are not recognized. They are something else. They are a corp, partnership or disregarded. In the last case that would be you. Corps and partnerships have certain tax advantages. S corps are flow through like partnerships but partners get basis for non recourse debt so if your business borrows money generally a partnership is best. To have a partnership you need two different taxpayers (wife/family member) otherwise your election is no good. You also do not need to make an election if you have two members in your llc as partnership is the default tax status. At that point you can only elect corp status. Multiple member llcs are not disregarded.

So rethink this. You are likely getting no liability protection from an entity. Are you getting tax benefits? Is it worth it?

Another tip. Get the llc in the state you live in. Cuts down on paperwork. No out of state sec state filings.

One more thing. Many people like to have a partnership to keep their personal tax return separate from their business tax return. There is merit to that but you are not saving in taxes. Unless you are cheating by running personal expenses through your business. Hence the separate returns.