Using an LLC and C corp

[cjg]

NJ.

I wanted to see if I open a C corp and then create an LLC owned by the C corp could I use the LLc to buy and sell real estate?

Also would the purchase of any new real estate be considered a business investment for the c corp and come out of the company pre-tax or would i need to use the after tax profits of the c corp to purchase any new real estate?

 

[tranquility]

Each state's laws on LLC's are different. Generally, a c-corp can be an owner of an LLC and an LLC can own property. Question #1 is yes.

Question #2 is more complex than the forum allows. You're talking fancy law now. The interaction and ramifications between the two will be hard to follow and will depend on the precise facts. You will not be able to do this on your own correctly without spending a lot of time in study. Each time I read the question, I come up with a different question to ask to further refine the facts.

It's always better to start with your goals and work the business organization around those goals then come up with an organization and ask "can I do this"? If you are trying to create a limited liability for each property transaction, an LLC or series LLC is often used. (Many people, in order to limit liability, don't like to put more than one property in an entity.) But, from your question, I sense a non-business purpose of playing with the books a bit with loans and transfers back and forth and how those things are handled depend on what you are actually doing.

 

[cjg]

Thanks tranquility,

No this question is all business.

I am simply looking to set-up a corp, that will grow now while I'm working. So I would like to keep earnings in the corp and use them to grow the business. I was simply trying to see if the c corp that owns the real estate llc (real estate llc makes it easier to buy and sell r.e.) and a large share of a part time business. could I use the profits from the corp and income from the real estate to aquire more assets for the corp IE buying another property and increasing the business.


As for the scope of this forum.
My biggest problam is finding a good legal / accounting team that has some sort of imagination.... and can see past the LLC. (I am lining up to get hammered with self-imployment taxes based on some bad accounting advice, with using an llc for a business)

 

[tranquility]

You're losing me here. I started to write about "at risk" and other problems with the LLC and losses/profits, but once I began I had to hem and haw with too many assumptions in less than a paragraph. While you're getting closer to the goal-setting I think should start such an undertaking, with such a complex arraingement you really need a business plan before starting. A detailed plan. Trying to figure out how things will come together makes my head hurt--and it's only Monday.

Remember that corps are double taxation in that their profits are taxed. Most of the C-corps we have as clients don't make any money. When you talk about plowing coporate profits back into a wholly-owned subsidary LLC, that does not generally seem like a good plan. (We'd have to look at some actual numbers in the way you envision their use to be sure.) If you're not careful in this profit/income money back and forth you may lose the LLC's protection and put all the Corp's assets at risk liability.

 

[cjg]

lol... sorry.

My real question is: can a C corp buy real estate before taxes with its income to increase its assets.
I'm looking to grow a company not fake out the irs.

As with double taxation:
double taxation only happens two ways. Dividends and the otehr slipped my mind. If I work for the c corp my salary is a deduction to the corp.... also my bonus is another deduction to the corp.

I would only get double taxed if i tried to pass out dividends, then the corp would pay taxes on the divs, and i would have to personally pay taxes on the divs again.

 

[clueless3]

#1: Yes, the LLC can buy and sell RE.

#2: Yes, the purchase of RE is pre-tax.

That said, you might want to re-consider your entity structure and why you want to use your C Corp to be the final beneficiary of all the RE holdings. That might be looked down by the IRS as a "personal holding corp".

Second, double taxation issue. Yes, the C Corp is doubly taxed if you try to give out dividend to the shareholders. No, it's not doubly taxed if you take it out using salary or bonuses. However, from a tax standpoint, taking the money out of the C Corp with salary or bonuses is not the best idea either. Having the income from the LLC to flow directly to you (instead of into the C Corp) is better since you don't have to pay self-employment tax.

A C Corp has its uses. In this instance, you are not making the best use of it; you're simply incurring more taxes unneccessarily.

 

[tranquility]

It is interesting to have so many dead threads revived where the original poster is long gone. Most of this new life has been through simple declaritive statements like:

#2: Yes, the purchase of RE is pre-tax.

Which in some cases may be true, in the OPs case is almost certainly wrong. Purchasing depreciable property is not usually an expense unless one is a "dealer" in property.

And:

Having the income from the LLC to flow directly to you (instead of into the C Corp) is better since you don't have to pay self-employment tax.

Doesn't it depend upon what the OP is doing and how much of his effort is involved with the LLC?

With complex questions where all the facts are not known, isn't it usually better to use modifiers like usually, and generally and the like? Of course that doesn't make you seem bold and sure of your answer, but sometimes even knowledgable people can't be sure. This is one example. I won't go through all the other postings as the OPs are probably (modifier for my assumption) no longer here, but can find fault in many. You seem to know what you are talking about, but state things so broadly so as to encompass reasonably-assumed facts which would create error. This is just a free advice list, but I bet the answers are really important to some posters. Be sure you treat it as such.

 

[cjg]

Hate to tell you this but if you are managing the llc's re holdings then your paying self employment tax as well.... so where are those tax savings? The llc is only good if you are

As with the c-corp, why does everyone assume, I want the cash now.... Maybe I plan on actually building a nice size comapny that will take on an investment team, and buy / sell and hold RE. Also it would be paying me a salary and Growing.....

Thats what what I am looking to do.

This is what I was looking to do. Not cash out every year and spend it on items i don't need.

 

[tranquility]

Hate to tell you this but if you are managing the llc's re holdings then your paying self employment tax as well.... so where are those tax savings?

I agree with you, which is why clueless3 was wrong.

As with the c-corp, why does everyone assume, I want the cash now.... Maybe I plan on actually building a nice size comapny that will take on an investment team, and buy / sell and hold RE. Also it would be paying me a salary and Growing.....

Corporate profits are taxed. Real estate in a c-corp may have problems in that capital gains will be at corporate tax rates. Also, you have the personal holding corporation tax issue clueless3 brought up if there is rental income on the property. You also have the issue of when you do the final sale of the corporation or of the property, what are you going to do with all that appreciated property? (Although not your particular problem, there won't be a stepped up basis on certain events.) Even if you delay the double taxation--you will still get it except for your salary. That salary can be manipulated a bit to keep the corporation from making much money, but there are limits.

 

[cjg]

I've heard that capital gains is big for a c corp when they go to sell RE thats why most c-corps hold assets in the LLC, which is what I would plan to do.

I'm sure there is a way around the personal holding corporation.

What My goal from the start is to build a company that I will be able to become a full-time employee of, which I can grow... Its a lot easier to buy more properties when you paid 15% tax on the money then at 28%.

Also if The c-corp makes 50k or less its taxed at 15%, but even if it makes a little more, the tax would be similar to what I would have to pay as an individual or llc....(since the llc passes through anyway)

My big question is, could I create a RE company that could use pretx money to buy more assets via RE for the company....

I'm sure MCDonalds buys AAA locations pretaxed for a burger joint.

 

[tranquility]

My big question is, could I create a RE company that could use pretx money to buy more assets via RE for the company....

For what you are saying, no. I could explain it technically, but conceptually you are really only changing the form of an asset (money to land). If someone gave you the land outright as payment for your work, would that be income? Yes. Why do you think you could take income as money and translate it to property in order to make it tax free? And, before you say something about buying office supplies with the money as not being income, you use up those supplies in making your income. Do you use up the property?

 

[cjg]

ok no office supplies here, just looking to buy a $200k condo that would generate $13k a year in income, then would like to use that income to purchase a second and so on.

so say I have two condos, that generated $25k in income, now I wanted to use that $25k to purchase a third condo, I would have to pay tax on that first and then buy the third property, or is there a way I could buy that third place before taxes?

PS Thank you for your advice.

 

[tranquility]

Ah, finally facts. With your business model, you (c-corp) would almost assuredly be considered a personal holding corporation. Also, the income you make is going to be taxed before you can use it to invest in a third property. I see no value whatsoever in a c-corp holding company.

You will not be able to make an income stream tax free to invest in other income property no matter how you organize things. Many people like to defer taxes by taking the two properties and do a tax-free exhange into a larger property.

 

[cjg]

lol...

Damn personal holding company status.... there is a light at the end of the tunnel here...

It says 60% of income from personal holdings... Thats the catch isn't it.

So say that my 2 condo business now makes $25k a year from rents.

And I sell the c-corp 75% of my online business which generates $100k from advertising. (so it would get $75k from that)

And I make an addition $10k a year from day trading stocks under the c-corp on the public market.

Could I then pay myself a salary of $60k, and then the extra $50k would be left for a tax of 15% which I could use to buy another property, or to further invest in the markets?


Outside question.... If I make $25k from rents, yet $23k is paid to expenses would that be $25k towards the personal holding status or would it only be the $2k profit income.

 

[tranquility]

I would have to look up to see if expenses are segregated as to source income. I mean, if the property were in one entity, clearly only the K-1 amount would count. But if everything were in the same entity, I don't know how that calculation would work as we don't have a lot of clients in that situation.

As to the more specific rest, that is the type of question someone comes in to see me would properly present. It would take at least a couple of hours of work to determine the acutal issues and results from such an arraingement. Sorry, but you're not paying enough for that much time. I do note, at the end of the day, any money you pay in taxes through the corporation from income is money you will pay taxes on again someday when you take it out.

While your tax rate may be manipulated to be less than your ordinary income tax marginal rate, you will still want a distribution someday and will need to pay taxes on that. Or, alternatively, you can reduce assets to take a salary--which you will pay taxes on. Only if you can get your corporation to pay no taxes will you not get hit with additional taxation over doing things another way. You may defer some portion of taxes by doing it this way, but your overall tax burden would be increased.