- 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.
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