Discussion:Llc vs. partnership
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Discussion Forum Index --> Basic Tax Questions --> Llc vs. partnership
Discussion Forum Index --> Tax Questions --> Llc vs. partnership
| 27 March 2009 | |
| HI Everyone,
I have a client with a 25% interest in a rental property. She wants to know what is best, to form an LLC, LLP or general partnership. We're in California, so LLC has the gross receipts tax. I will advise her to talk to an attorney, but what are your general suggestions when clients ask. I don't care for LLCs because of the gross receipts tax, but I know they do offer some benefits. Thanks for any input! | |
| 27 March 2009 | |
| I don't do CA and am not familiar with the gross receipts tax, but generally, if an LLC isn't a good idea, you could do a LP with an s-corporate GP. Align the ownership percentages of the two entities. It's a couple extra tax returns, but if the gross receipts tax is such a big deal, it might be worth it. Basic asset protection suggests avoiding the general partnership or an individual GP in an LP because of unlimited personal liability. If the other partners want to do a general partnership, she might want to do this with just her 25% anyway - depends what her liability exposure is. | |
| 27 March 2009 | |
| Just go with the LLC and bite the bullet on the gross receipts tax. Although it's very annoying, it's not terrible onerous (I would assume your client is looking at the $900/year tax). An LLC is simply the best structure for real estate from both a tax and asset protection perspective. | |
Michaelstar (talk|edits) said: | 28 March 2009 |
| What kind of "rents" / "gross receipts" are you talking about? As in total dollar amount. | |
| March 28, 2009 | |
| Dingo - there's a minimum tax in CA on LLC's, S corps and C Corps of $ 800.
The LLC fee on gross receipts is a different computation (and is still under attack/review concerning its legality, I think...). It maxes out at $ 11,790, on gross receipts of $ 5 million and over. The fact that it's on gross receipt - deductions are not considered - is what makes it onerous. I just finished an LLC with $ 2 million gross, but a net loss. LLC fee is $ 6,000! | |
| March 28, 2009 | |
| Dingo - just checked your profile. Maybe you have access to info as to whether the legality of the LLC fee is still being challenged in Ca. | |
| 28 March 2009 | |
| i do one CA llc return so i am not an expert. I believe the "Worldwide" portion of the llc fee was challenged and reversed but now it currently covers state receipts.
However, I don't feel the llc is so important for a rental property. For 800$ you could buy a very good liability policy from an insurer that would suffice. | |
| 2 April 2009 | |
| You're correct Ek, the gross receipts tax only applies to california income. Although, that really doesn't help you if the LLC only hold California real property.
Ok. 50k per year will not result in any gross receipt tax, so your client would only have to pay the $800 annual tax Belle was referring to. Ek makes a good point about forgoing the use of an LLC and using the $800 to fund a liability policy (which I would strongly recommend doing in any event), but I've seen situations where torts occured on the property and coverage was denied so I would caution that even a very good insurance policy may be insufficent. | |
| 2 April 2009 | |
| I've seen LOTS of situations where liability coverage was declined or insufficient. Adequate insurance is an important (and often overlooked) first step, but entity structure is really a no-brainer second step. Don't come crying to me for asset protection AFTER the porch collapses -- it's too late. | |
