- Hey guys, in this video, we're gonna discuss
what is a Disregarded LLC versus a Partnership LLC,
for real estate investors.
Okay, let's get started.
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Okay, disregarded LLC, partnership LLC,
What are we getting at here?
Well first thing you have to understand is that
a limited liability company,
It's what we recall a hybrid entity
from federal tax purposes.
And what that means
and typically people get confused on this
is that when you're setting up a limited liability company,
you're gonna set it up first with the secretary of state,
of the state where you want to get it going.
So if I wanted to set up
a Florida limited liability company,
I'm gonna set it up in Florida.
Tell them if it's member manage or manager manage
and file my articles.
And then after my LLC is set up,
that's when I'm going to come down and contact the IRS,
So I got this LLC here.
I'm gonna reach out to the IRS and say,
hey I need an EIN number.
And so I'm going to fill out what is referred to as an SS4,
to obtain my employer identification number
for this business entity.
Now, when you're filling it out, because it's an LLC,
you have, we have more than this,
but typically it's four options.
You can have it taxed as a C-Corp,
S-Corp,
Partnership,
all right, we're gonna talk about that.
Or it can be a Disregarded entity, all right.
Now, so what does that mean when I say it's disregarded?
Well, what we're getting at there is number one,
it only has one owner.
So the entity we're creating, this LLC,
there's only gonna be one owner in this, this entity.
Now that could be me, I could be the owner.
It could be a Wyoming LLC, as you know,
I like to always use this Wyoming LLC down here,
as the owner of a state-specific LLC
for anonymity and asset protection.
So that could be the one owner
of that limited liability company,
but it's not gonna be two.
In limited circumstances, if it's a house
or if it's a married couple in a community property state,
you could do it.
But for the most part, it's going to be one individual
or one entity.
So if I set it up and I choose it to be a Disregarded LLC,
because there's only one owner,
what does that mean to the IRS?
Well, what it means is this,
that whatever you have inside of here,
let's say we transfer a piece of real estate into the LLC,
the IRS is not going to look at the LLC
for any type of tax return.
It's not even to treat the LLC if it owns the property.
From a tax standpoint, the IRS is going to look at the LLC
and say, does it exist?
This asset is really owned by this individual
right here for tax purposes.
Now this has nothing to do with asset protection.
And so many people confuse that.
They think, well if I have a disregarded LLC
and someone sues, they're gonna go
right through the LLC and sue me.
Your tax status for the LLC
has nothing to do with the protections it provides you.
Don't even worry about that.
So when I have a disregarded LLC,
if this property generated for me, $20,000 in income,
that's gonna show up on my 1040.
In fact, I get this question a lot,
a real estate investor will contact me.
They have five properties.
They need to create five limited liability companies.
And they want them set up as disregarded LLCs.
And they say, what's going to happen to my taxes.
Nothing.
What do you mean nothing?
Well, what did you do last year on your return?
Because this year you're gonna do the exact same thing.
They'll say, well, I set up an LLC.
I said, I know it doesn't matter
because the LLC is disregarded.
You don't have to file anything, right?
Just keep filling out your taxes the same way you've been
doing it and everything will be fine.
And people often wonder, well do I have asset protection?
Sure you do.
Because you don't own the property from a legal standpoint,
but from a tax standpoint, you're treated as the owner,
hence the word disregarded.
Now, do you, should you use disregarded LLCs?
Absolutely.
I think they're great.
If you can set up an LLC
and to make it a disregarded entity,
you ought to consider doing that, in many situations.
But who is going to be
that member in the LLC is the question.
That's when we start looking at partnership LLCs
now at this point in the game.
See with a partnership LLC,
if you want partnership tax status,
what you're gonna have to do is bring on someone else.
So, for instance, if I created my Wyoming LLC down here,
this is my Wyoming,
and it's gonna own all of my state specific LLCs,
one, two, three, like that.
All of these LLCs are gonna be owned 100%
by this one, Wyoming LLC.
So all of these, I'm just going to put a D inside of them.
This means they're disregarded.
So they don't have to file any federal tax returns.
So if they're not filing any federal tax returns,
where's the income going?
Who's reporting it?
Well, you have a couple of options.
If I create this Wyoming LLC, and I'm the sole owner of it,
then because I'm the only owner,
the only option I have is disregarded.
I mean, you could go S or C Corp,
but you don't want to do that.
So really your only option is disregarded status.
So it would all flow through this Wyoming LLC,
come down to you and show up on your 1040,
schedule E, page one.
Again, your tax return would not change.
But if you want to bring someone else
into your investing with you,
like a spouse, all right,
now, you can no longer elect disregarded status here
because how many people do we have involved?
We have two.
It doesn't even need to be a spouse,
maybe you're not married, you don't have a spouse.
Well, it could be another entity that you have.
You can make your entity, your partner,
give it a 1% interest.
And now there you go,
you got a partnership.
Partnership requires two, a minimum of two partners.
You can have more, but the minimum is going to be two.
So now if I have two people here,
when I apply for my EIN number,
I'm going to elect partnership tax status for this LLC,
because it has two members.
It's no longer eligible to be a disregarded entity.
So now, because it's going to be a partnership, down here,
that means it has to file a tax return, which is a 1065.
Okay, now the 1065 that you file, that's okay.
It still pass through,
but it doesn't hit your return the same way.
You see, if this was all disregarded,
as I showed you earlier, it all flows down on your 1040.
Well, when you make this a partnership,
now what's gonna happen is this is all gonna flow down
to here and it's gonna get calculated out
on the partnership's tax return.
There's no taxes that you have to pay
at the LLC by the way.
With a partnership, returns just informational.
All it's going to do is take it all in,
mix it all up and then spit it out and say,
this is how much this partner owes in taxes,
this is how much this partner will owe in taxes.
So if I had two partners here,
both of these individuals were 50-50.
Because they're married and they filed jointly,
it's gonna show up on their joint tax return via K-1.
And what's gonna happen
is this 1065 is gonna give them a K-1.
And I got a video on what is a K-1,
a short video for you if you're unfamiliar with it.
And so now it's gonna show up in your 1040,
because it's real estate,
it's gonna show up on your schedule E.
Schedule E.
But what's different now,
is that where these were disregarded
and they filled out on page one.
You know this, if you look at your 1040, you know that page,
you'll see your schedule E,
it has all your properties listed there,
maybe have multiple pages.
Now what happens is
it shows up on the backside of that page,
which is what we refer to as page two.
And so you take this K-1 you got,
and you take the information off of it
and you put it on your schedule E, page two.
So, why do all of this when you're setting the entities up?
well, it comes down to this,
by setting these up as disregarded entities
in this overall overall structure,
I'm saving myself on having to prepare a bunch
of tax returns and make my life complicated and pay a CPA.
Now, why wouldn't I make this one a disregarded entity?
Why did I make it a partnership?
Because I think there's some compelling reasons
to keep this as a partnership,
as a buffer between you and your real estate.
And namely that comes down to the fact that
audits, fewer audits on 1065s than 1040s, all right.
So that's what I want to do,
I want to minimize the risk of audit
on the stuff that's going on in this jumbled mess over here.
Another reason why I'm gonna want that K-1
or that 1065 and give me the K-1,
it's when I working with Freddie Fannie lenders,
how they evaluate the income from my rental properties,
that I want to make sure I get a boost
in my debt to income ratio.
So that can be a benefit for you,
to have that partnership return.
Yes, it's an extra expense, but it provides certain types
of benefits as you move forwards.
A third benefit that can come from it is that
as you move into different asset classes,
you're gonna look like you're a more experienced investor.
Because the more experienced investors,
invest through partnerships,
entities that file tax returns,
and they don't do it in their own name.
Because if you were to turn over your tax return to someone
and you had 35 LLCs, all set up as disregarded,
they wouldn't know that,
they would think you're just investing in your own name.
And if you said, hey, I'm real experienced.
Yeah, maybe you are but from a business side,
you don't appear to be that experience
because that's not how people do it,
or the experienced investors do it.
So this gives you a little, I think a boost there
in credibility when you're telling someone
yes I'm experienced, if they look at your tax returns.
So I do like the partnership for those three reasons
between you and your entities.
Now, I get this question all the time.
What if I only have one property?
Well, if you only have one property,
you can just make this one a disregarded entity
and bring it right down under your return.
Because you can always change it at a later date.
As you start to acquire more,
you can take this disregarded entity
and elect to treat it as a partnership,
say three years from now or two years from now.
Only thing you'd have to do though,
is bring in a second partner into
that limited liability company to elect that status.
So as you see, you know, for real estate investors,
there's no problem with disregarded entities.
It doesn't impair your asset protection at all.
It's only a tax selection.
And really it's just an identification number,
so you can get a bank account opened up.
Because other than that,
you really don't even need an EIN for an LLC,
that's disregarded.
But if you sell the property, of course,
it's held in the name.
The title company is gonna want to have
all that information, so you just go and get it.
Anyways, I hope this makes sense.
When you're choosing disregarded status,
what it means for real estate investors
and their limited liability companies versus partnerships.
Guys got any comments,
leave them down below or questions as well,
and make sure I get to those.
And you got any ideas for other video topics,
you'd like me to talk about, be sure to send those to me.
I truly appreciate anything that I get from you all.
All right, take care.
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