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Ask Dave

One Says LLC, Another Says S-Corp

Dave helps Richard settle a debate between his advisors over whether to do an S-corp or an LLC?

QUESTION: Richard had decided to incorporate his business, and he has 4 rental properties. His tax attorney told him to S-corp his business and forget the rental properties, but his accountant said to do a limited liability company on both of them. Who is right, and why?

ANSWER: I’d land somewhere in the middle here. I would LLC the rental properties. An LLC company is great for holding real estate, but I would keep the business as an S-corp. There’s not a lot of difference in the operation of a small business between an LLC and an S-corp; just some filing differences and no tax differences. I like the S-corp for the operating business, and you can’t use it for rental property. I like because it’s a completely different and clean entity. The S-corp is a better operating entity; definitely put your rental property in an LLC.

As you buy another property and sell off some of what you have, I would systematically move into limited liability companies The reason being is that, if someone falls and breaks their face on one of your properties, all they can take is what that company owns. You’re not personally liable because you don’t personally own it. You also need good liability insurance. The building you own is a separate entity from your business, so a person who sues can only get so far, and they can’t get your house.

None of this helps taxes. Don’t incorporate until you have enough assets or enough business happening that there is a target on you.