LLC questions

[gregzilla 0]

I have a few questions about the benefits of forming an LLC and also about how I would be sure to use it correctly?

 

If I had an LLC, I would just make sure that all contracts were between the LLC and the other party as opposed to between me and the other party, correct?

 

When purchasing things such as a new computer or a new car, would I purchase it in the LLC's name? And then could the LLC deduct the expenses for those and anything else that could be deemed essential for "business".

 

Or is "investing" not consdered a business for those purposes?

 

LLCs just pass their profit along to the owner and so don't pay federal taxes, correct? But I assume they still need to file.

 

Thanks for any info,

Greg

[MichaelC 160]

Greg, I'm going to move this to the Tax Strategies forum, where I think Dave T will have some information for you.

The one question I will answer in the meatime:

If I had an LLC, I would just make sure that all contracts were between the LLC and the other party as opposed to between me and the other party, correct?

Signing a Lease with Option to Purchase Agreement between you and the homeowner with your name on the agreement would leave you exposed and liable in the event a problem occurred and you had to, say, break the lease. The homeowner could go after you and your assets.

Signing that same agreement under your formed LLC would shield you and your personal assets from a lawsuit and any resulting judgement.

[tgnite 0]

Michael, under the scenerio you decribed wouldnt any asset your LLC owned now become vunerable?

[MichaelC 160]

Michael, under the scenerio you decribed wouldnt any asset your LLC owned now become vunerable?

Yes. Which is why you don't put any assets into the LLC. You sign your deals under the name of the LLC. But you certainly wouldn't put your personal residence under that same name, or a vehicle.

[Dave T 0]

Or is "investing" not consdered a business for those purposes?

 

LLCs just pass their profit along to the owner and so don't pay federal taxes, correct? But I assume they still need to file.

The benefits of forming a business entity -- whether it is a LLC, S Corporation, C Corporation, or a sole proprietorship -- need to be discussed with your tax advisor, your CPA, and your estate planner.

 

Each entity has different strengths that may make one entity better suited for a particular individual's business when viewed in the context of his total financial posture.

 

You also should understand that the IRS definition of real estate investing is the acquisition of real property which is held long term for the production of income, or for future appreciation. In this context, when you are buying and selling real estate for a profit, you are engaged in an active business -- you are not investing in real estate, you are a dealer to real estate.

 

As a dealer, your total profit is taxed as ordinary income in the year of sale, even if you have disposed of the property in an installment sale. Additionlly, your property is not eligible to participate in a 1031 exchange. There are some "tax gurus" in the marketplace who claim that with the proper structure of your lease and option documents, you can claim to be an investor who just happens to sell with options.

 

I take a more conservative approach and do not completely support this position. If you are primarily engaged in lease options, or sandwich lease options, then I assert that you are engaged in a dealer activity, just as you would be if your strategy concentrated on quick flips. All your property transactions are considered an active business, and, self-employment income taxes are usually in play.

 

Since your activity is an active business, in the absence of a formal business entity (or, if you are operating a LLC as a disregarded entity), report all your income and expenses on Schedule C. On Schedule C, you would take expense deductions for your non-durable supplies, while you might capitalize your durable equipment purchases (such as a computer) and take a depreciation expense each year. The net income from your schedule C, is also used to calculate your self-employment taxes on Schedule SE. Consult your CPA for specific details.

 

Also, make sure your CPA explains how business start-up expenses are amortized over the first 5 years, rather than directly expensed against the first year of operations.

 

Again, I remind you that I am not a corporate tax specialist, I am not a CPA, nor am I a lawyer. Everything posted in this forum is my personal opinion and is posted for educational purposes only. My comments are not tax or accounting advice. Please consult a licensed professional for specific details.

[Akinwale 0]

Or is "investing" not consdered a business for those purposes?

 

LLCs just pass their profit along to the owner and so don't pay federal taxes, correct? But I assume they still need to file.

The benefits of forming a business entity -- whether it is a LLC, S Corporation, C Corporation, or a sole proprietorship -- need to be discussed with your tax advisor, your CPA, and your estate planner.

 

Each entity has different strengths that may make one entity better suited for a particular individual's business when viewed in the context of his total financial posture.

 

You also should understand that the IRS definition of real estate investing is the acquisition of real property which is held long term for the production of income, or for future appreciation. In this context, when you are buying and selling real estate for a profit, you are engaged in an active business -- you are not investing in real estate, you are a dealer to real estate.

 

As a dealer, your total profit is taxed as ordinary income in the year of sale, even if you have disposed of the property in an installment sale. Additionlly, your property is not eligible to participate in a 1031 exchange. There are some "tax gurus" in the marketplace who claim that with the proper structure of your lease and option documents, you can claim to be an investor who just happens to sell with options.

 

I take a more conservative approach and do not completely support this position. If you are primarily engaged in lease options, or sandwich lease options, then I assert that you are engaged in a dealer activity, just as you would be if your strategy concentrated on quick flips. All your property transactions are considered an active business, and, self-employment income taxes are usually in play.

 

Since your activity is an active business, in the absence of a formal business entity (or, if you are operating a LLC as a disregarded entity), report all your income and expenses on Schedule C. On Schedule C, you would take expense deductions for your non-durable supplies, while you might capitalize your durable equipment purchases (such as a computer) and take a depreciation expense each year. The net income from your schedule C, is also used to calculate your self-employment taxes on Schedule SE. Consult your CPA for specific details.

 

Also, make sure your CPA explains how business start-up expenses are amortized over the first 5 years, rather than directly expensed against the first year of operations.

 

Again, I remind you that I am not a corporate tax specialist, I am not a CPA, nor am I a lawyer. Everything posted in this forum is my personal opinion and is posted for educational purposes only. My comments are not tax or accounting advice. Please consult a licensed professional for specific details.

<{POST_SNAPBACK}>

 

OK to touch on this subject. Since I have a LLC alreaydy. I am going to organize a S-corp as well. SO with that being said. Can I use the S-corp to secure the deals (flips, lease options, CA's, etc.) and then use my LLC to purchase supplies, laptop, advertising materials, etc. so that those costs are tax deductible and can be reported as expenses for the company.

 

I hope that made sense. In theory, the S-corp would be separate from the LLC so if all hell broke lose those entities would not be tied together. Would this help out the issue of having the assets tied to the company?

 

Please let me know.

 

Thanks much,

 

Akin