Talk:L.L.C. vs. Sole Proprietor

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Are there any income tax benefits for an individual without employees, to do business as either an L.L.C. or S Corporation rather than sole proprietor (I realize there are non-tax reasons for doing so)?


There are some theories that a sole proprietor with a large gross income, say $100,000 or more, is more prone to be involved in an audit than someone doing business as an S Corporation or a LLC. $100,000 is not a large gross income for a business entity. Therefore, the audit is less likely. I have seen IRS sampling statistics that show that a schedule C is much more likely to be audited than a partnership or S-Corp. This may be in part because Schedule Cs are more likely to be prepared without professional assistance and therfore more likely to have signifcant errors.

Even an individual without employees, if they choose to be taxed as an S-Corporation must pay themselves a reasonable salary for their services to the corporation and this means they must do payroll accounting and reporting. They also must pay unemployment taxes on the owner's salary. There is an exemption in California, however, that allows the employee-owner to be exempt from SDI if they file Form DE-459, Sole Shareholder/Corporate Officer Exclusion Statement. However, the advantage of the S-Corp tax status vs. the LLC status is the opportunity under the S-Corp to argue that some portion of the income comes from an investment in capital and employment of others and therfore is a return on your investment not subject to Self Employment tax. This game of the beat the SE tax works only after you have paid a resonable salary for all services rendered to the corporation.

Generally if the business involved renting real estate I put them in an LLC. If they are operating a business, I usually use an S-Corp.Mcewencpa


Can you tell me why you would put a rental real estate business in an LLC vs S Corp? or why not a Limited Partnership?

Posted by TaxManPlus at 3:34 p.m. on 3 June 2005.


Assuming that the LLC is a sole proprietor or partnership, placing rental property in the LLC would not alter the underlying ownership or holding period of the property. If the owner incorporates, a new "person" has been created. The property must be transferred -- SOLD -- to the corporation, and that could be a messy business.

--Jancpa 18:24, 24 Jun 2005 (CDT)

S corporation shareholders may be unable to recognize losses from the real property due to basis limitations. (This is in addition to at-risk and passive loss limitations.)

In a typical real estate transaction, the owner borrows most of the purchase price from a lender. In the early years, the owner recognizes losses on the investment due to depreciation.

Income, deductions, gains, losses and credits of an S corporation are passed through to the shareholders and reported on their respective individual income tax returns. S corporation shareholders cannot recognize losses in excess of their basis in the S corporation. This basis includes loans made by the shareholders to the S corporation, but not loans made by a lender to the S corporation.

If the real estate is owned by an individual or a partnership, the basis would include the loans incurred to purchase the real estate because the borrower, for purposes of applying the basis rules, would be the individual or partnership. Janie 11:53, 11 Aug 2005 (CDT)

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