What entity should I chose for my new business? Ask a Real Estate CPA!
Starting a new company is an exciting process. Your dream of becoming your own boss is about to come true. Walking to work from the kitchen to your new home office, with nothing more than a cup of coffee, your pajamas, and a smile. Big smile. The work is hard, but the benefits can be great. You’re up to the challenge. Before we hit the ground running and make it rain with money, we need to decide what type of company structure you want to have. As a Real Estate CPA firm, we get this question from new entrepreneurs and real estate professionals all the time. If you have any questions before and after your real estate transaction as a Real Estate CPA at the Nealson Group.
The most common forms of business entities for new entrepreneurs are sole-proprietorship, limited liability company, and S-Corporation. Now which one you should choose depends on a number of factors, because each one has its own benefits and drawbacks.
The good thing about being a sole-proprietorship is that it takes almost no effort to become one. Super easy to set up, and they require no formal paperwork with the state or the federal government. You can use your own name as your business name. You can also use your social security number as your tax identification number. As a Real Estate CPA, in this crazy world of identity theft, I would not recommend using your SSN; instead I would request a EIN (Employer Identification Number) from the IRS. We can help you with that.
The profits of the business are yours (as they should be), and you can take money out of the business with no distribution or tax consequences like in a corporation. As long as you don’t employ other people, you have no payroll tax filing requirements to be worried about either. And there’s no separate business tax return you need to file.
A limited liability company, also known as a LLC, or a Single Member LLC (meaning it only has one member) is very similar to a sole-proprietorship. It’s easy to operate; you can put money in and take it out with relative ease. You don’t have to have a board of directors, unless you want them. You can have your real estate CPA firm report your business activity right on your individual tax return.
S-Corporation, or a small corporation, has certain tax advantages that you don’t get with a sole-proprietorship and a LLC. An S-Corp is a corporation that is treated, for IRS purposes, as a “pass-through” entity. This just means the shareholders, unlike shareholders of a C-Corporations (i.e.: Apple, Lowes, Target, etc) are not subject to income tax and tax on dividends. Instead, the owners are directly taxed on their percentage share of the income. You pay yourself a salary, and your Nealson Group CPA firm will file your payroll taxes for you.
Here’s the Straight Talk.
To quote the attorney who taught one of the two business law classes I took in college to obtain my CPA license,” If you run your business as a Sole-proprietor, you are a dip s**t!”. No lie. He was so adamant about getting this point across that he brought it up almost every class. In the hope that if you walk away with any knowledge that semester, it’s stay away from sole-proprietorship. Unless, you’re a …..well…..you know.
Why, you ask? Because in this crazy world of lawsuits, a sole-proprietorship offers no protection against personal liability. Everything will be fair game for the creditors….including the shirt on your back. There’s nothing to prevent a creditor of your new company (either through debt, lawsuit, or any other) from attacking your personal assets. “Well, I’m a real estate professional, what do I have to worry about?” Your personal assets include your bank accounts, your home, or your automobiles (not only yours but also your spouse’s). Now, some states like Florida have homestead ? which allows for some extra protection, but still, why on earth would you risk it?
So what do you do? Get limited liability protection offered by the state. In general, this protection covers the personal assets of an LLC owner, from creditors’ claims arising from the business. Keep in mind, a court can still override the LLC shield, so it’s always a good idea to have insurance.
The LLC is easy to run. Your Nealson Group Real Estate CPA Firm can file the necessary paperwork with the secretary of state and the IRS, and just like that you have peace of mind. As I mentioned before no need to have a board of directors, you can occupy every seat of the board if you’d like. You don’t have to pay yourself a salary, if you don’t want, but you will pay self-employment tax on all of your profits. Not a huge deal, around 15.3% in 2016 until you get into the six figure income then it changes. But we can help you with that.
The S-Corporation offers the same layer of protection as a limited liability company, shielding the business owners’ assets from creditors. The business profits (money left over after paying yourself and your business expenses) are subject to federal and in some states, state income tax, but they are not subject to self-employment tax which can be a savings around 2 – 15% on those profits.
You will have to file a separate business tax return, known as a 1120S. Your Nealson Group Real Estate CPA Firm will handle this for you (see our pricing page, it’s included in every package). If you read other articles they will tell you that the biggest disadvantage to being a S-Corp is the administrative “burden.” That’s crazy talk. If you have the right CPA firm, there is zero extra burden on you. Yes you have to pay yourself a reasonable salary which means filing payroll tax (again ALL covered in your monthly fee, see our pricing page), but that protects the rest of your dough from self-employment tax.
The Key take away is this. You want to shield your assets from liability the best you can, and you don’t want to pay Uncle Sam one red dime more than you have to by law. (Thank you Donald Trump!)
This can feel overwhelming, but it doesn’t have to be with the right CPA firm in you corner. You want to keep things simple, but you need to have a plan. Focus on building your business, and let the Nealson Group focus on keeping your books and tax compliance in check. This is what we do.
P.S. The Nealson Group, LLC does not disclaim anything about this or any other blog on our website. See IRS Circular 230. We are not a law firm, we are a CPA firm. Nothing and I mean nothing written above constitutes legal or tax advice. BUT, we would be happy to consult with you to figure out which of my ideas above, if any, should be taken based on your specific and unique situation.