An LLC Question...

[Unregistered]

I run a small business as a sole proprietor and I rent the business premises. The landlord has offered to sell the building to me and I need some advice and ideas.

Is it a good idea to form an LLC with my wife as the other member and buy the building and rent it from the LLC? Am I allowed to do it and also what difference it makes if it's an S corp instead of an LLC.

I'm trying to educate myself a little in these area before meeting with my cpa. Any advice will be greatly appreciated. Thanks.

[Unregistered]

Do what your CPA tells you that's what you pay him for. He knows your situation.

[Bees Knees]

There isn’t much of a tax advantage to do so, but from a liability standpoint, I would suggest you use an LLC to hold the real estate separate from your sole proprietorship. I would also suggest you file as an LLC for your sole proprietorship. Keeping the two separated makes it more difficult for lawsuits and liability issues from your business to affect your real estate, and vice versa.

I tend to discourage people from forming an S corporation, unless you like a lot of extra paperwork. The LLC will accomplish the same liability protection. Some suggest forming an S corporation to save on self-employment tax. That issue is not as strong as it used to be. The IRS is cracking down, and I have seen too many S corp owners actually wind up paying more in FICA taxes than they would have by staying an LLC taxed as a sole proprietorship.

Like the other poster said, your CPA will know your situation better. But if he or she wants you to form an S corporation, make sure you ask about all the payroll tax issues and extra tax return filings, bookkeeping and state employment tax issues. How much extra would all that cost? Who is going to file all of that? And so forth.

[Unregistered]

Thank you Bees Knees for your quick reply.

Yesterday, I consulted with my CPA and he advised me form an LLC and buy the property. He also kind of suggested to somewhat increase the rent paid to the LLC so that a portion of the my self employment income can be converted to rental income from the LLC so as to lessen the self employment tax on the sole proprietorship.

[Donanita]

LLC Sole proprietorship

( quote- I would also suggest you file as an LLC for your sole proprietorship. Keeping the two separated makes it more difficult for lawsuits and liability issues from your business to affect your real estate, and vice versa.- quote)


I didn't think a LLC would help protect in lawsuits and liability issues in a sole proprietorship situation.

[OldJack]

liability?

I didn't think a LLC would help protect in lawsuits and liability issues in a sole proprietorship situation.

Strange comment. The main purpose the LLC concept was created was to provide protection, similar to a corporation, to a sole proprietorship and partnership type business. There is never protection for personal negligence and illegal acts but that is also true for officers of a corporation.

[Unregistered]

LLC is worthless

Once you form a LLC, you've just created more useless paperwork and set yourself up to pay franchise tax. A S Corp would be the way to go. It would give you the option to rent the building, which would be titled in your name, to the corp in order to avoid SE tax. You can't rent your building to the LLC because it is not a seperate entity-legally.

As for the "extra paperwork", if you're serious about your business and you expect to earn a profit in the future, you might as well incorporate now to avoid having to do it later.

Do it today.

[Bees Knees]

The original poster said LLC with wife to hold the real estate. That is a partnership, not a disregarded entity.

If you set up the LLC for the real estate business and set it up as a partnership with the wife, then the rent payments to the partnership as an LLC would not be subject to SE tax.

The whole S corp to avoid SE tax issue is a thing of the past. IRS is launching a major audit campaign to nab all you who set up S corps for your clients to pay low wages and high distributions just to avoid SE tax. The courts have already ruled on a number of these cases.

[OldJack]

Purpose of LLC

Once you form a LLC, you've just created more useless paperwork and set yourself up to pay franchise tax.

The franchise tax may be an issue in your state but in mine there is no franchise tax, no annual filing with the state (as is a S-corp), and no annual fee like there is with all corporations.

A S Corp would be the way to go. It would give you the option to rent the building, which would be titled in your name, to the corp in order to avoid SE tax. You can't rent your building to the LLC because it is not a seperate entity-legally.

You are confused. The LLC is a legal entity created by state law but just ignored for federal tax purposes. The LLC can legally own the property and receive rent income that is simply reported as income depending upon the federal reporting method of the owners. If the rent income stays in the LLC bank account the cash and the property itself is protected/limited from the individual's personal lawsuit or your other operating business the same manner as a corporation.

True rent income/expense in a single-member-LLC is a net zero on the 1040 tax return as the LLC is ignored for tax purposes and you therefore can't rent to yourself. Not true for the LLC in any other reporting method.

I am not implying the business should be a LLC, just the ownership of the property. The operating business should be an entity depending upon the needs and liability of the business.

[Unregistered]

Why not add your spouse or a 1% owner to the LLC and make it a separate entity? Won't that overcome the prohibtion against renting to a sole proprietorship?

[Unregistered]

Whah?

Why setup an LLC to be taxed as a corporation or partnership or sole proprietorship?

Why, if a LLC, a corp, a partnership are all seperate legal entities, setup a LLC at all. Isn't it just as easy to setup a partnership than a LLC. This way you can avoid the franchise tax.

LLCs are useless; they were invented so incompetent lawyers can stay in business.

[OldJack]

its all about liability and lawsuits.

LLCs are useless; they were invented so incompetent lawyers can stay in business.

A partnership provides no protection for the partners personal asset liability. In fact your partners actions may cost you (as a partner) your personal residence and all personal assets now and into the future. You have unlimited liability! duh.

In most states you don't need a lawyer to setup a LLC. If the property is in a LLC and someone is injured on the property and sues, the most they can get is whats in the LLC. Your residence and other personal assets are not at risk in the lawsuit unless you on behalf of the LLC are guilty of gross negligence or preformed an illegal act.

If you can't understand this basic fact you should continue to ignore the LLC entity.

[Bees Knees]

LLCs are useless; they were invented so incompetent lawyers can stay in business.

Incompetent accountants who give bad advice get sued by people with incompetent lawyers.

[S T]

Calif LLC

Well for those of us in Calif, forming a LLC can be an issue, as we not only have an annual $800 franchise fee to Calif, but Calif also charges on a sliding scale a gross receipts tax. Most other states do not charge this for LLC operations.

So would the question be in Calif to form a LLC for the real estate portion which would not be subject to SE tax. and then form another LLC for the business (keep in mind the franchise fee and the gross receipts tax) active member ( 500 hours per year) would still pay the SE tax, OR to form an S corp for the business and do the compensation as reasonable wage(issue W-2) (Calif will still charge the $800 franchise fee plus a 1.5% on net income on S Corps).

By forming one LLC for real estate and one LLC Or S Corp for the business venture, the liability issues would be separated, the client would be able to sell either only the real estate or only the business, or both if chosen. SE tax would only apply on the business venture either under the LLC (if more than 500 hours) or as an employee on reasonable wage under the S Corp.

Thoughts? Very confusing issue!

Sandy

[OldJack]

My thought is to not live or have my business in California! :-)