Author Topic: Setting up a new Real Estate LLC: Questions on Structure and Tax Reporting  (Read 3699 times)

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Hello everyone,

I have an LLC currently that I own in Pennsylvania with a business partner to invest in rental properties. I'm planning on starting a new LLC for my own real estate investing and would appreciate your thoughts on the following:
  • Should I structure the LLC is a sole proprietorship or partnership? I will be doing all the managing, but I'm wondering if there's any benefit to including my spouse as a member. My initial consideration was to ensure that she can takeover should I be incapacitated in the future, however, I'd also potentially be exposing her to additional liability when she isn't even an active participant in the business.
  • What are the differences in tax reporting for a sole proprietorship vs. a partnership? My research shows that a sole proprietorship simply completes a schedule C while the partnership requires a K-1.
  • Does a sole proprietorship run into liability issues or structural issues (i.e. opening a corporate bank account) if it doesn't have an EIN? It looks like a sole proprietorship could theoretically go without an EIN, thus avoiding the need to file a K-1, but I'm wondering if that causes other issues.
Thank you for your time

CowboyAndIndian

  • Handlebar Stache
  • *****
  • Posts: 1685
  • Location: NJ, USA
    • KOWines: Deep discount wine/spirits store.
Re: Setting up a new Real Estate LLC: Questions on Structure and Tax Reporting
« Reply #1 on: December 07, 2014, 07:12:22 AM »
From what I  understand, a LLC will protect you. So, your concern about exposing your wife to liablity is not correct.

If you do include your wife, you could even put aside a company match for her individual 401k ;-)

EricMA

  • 5 O'Clock Shadow
  • *
  • Posts: 20
  • Age: 34
  • Location: Massachusetts
Re: Setting up a new Real Estate LLC: Questions on Structure and Tax Reporting
« Reply #2 on: December 07, 2014, 07:48:35 AM »
I'm not a lawyer, but I've done this many times before and I am married to one. Hopefully this information is helpful but you should always consult an attorney and/or an accountant to get the best advice for your situation.

It sounds like the only reason you want to include your spouse is for the scenario where you are incapacitated and unable to run the company. This should be handled by estate planning; see an attorney and set up your estate plan together if you don't already have one. You should have wills, medical proxies (if you want them), powers of attorney, etc. In this case the power of attorney would be the document that would empower your spouse to make decisions on your behalf. It may be necessary to get a power of attorney document that explicitly mentions the LLC, but that's a question for an attorney.

For tax reporting, you're right. You can file a Schedule C for single member LLCs. A K-1 is used to to break out your percentage of tax liability for the company. As a member you're responsible for the taxes of the gains, and can use losses against your taxable income. If you were both 50/50 owners, you'd need to make and distribute K-1s to each of you. Then you'd each enter those numbers in your tax returns. If you're filing jointly anyway, the whole thing is a lot of extra paperwork for no real extra benefit IMO.

The LLC should shield you from any liability as long as you operate in good faith. No reason to bring anyone else in for that reason.

You should get an EIN. It takes 10 seconds to get one, and many Individual 401k plans require one (if you plan on going that route...) If you ever DO get sued and need to use that limited liability, it's better to have your assets in an account that has no reference to your personal SSN on there. It's free, easy, and opens doors to some excellent retirement account options - no reason not to.

Hope this helps.

Eric

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Setting up a new Real Estate LLC: Questions on Structure and Tax Reporting
« Reply #3 on: December 07, 2014, 10:34:57 AM »
Thanks for your responses, CowboyAndIndian and EricMA. Your thoughts have brought up a couple additional questions that I would appreciate your responses and/or the responses of the community:

For the first couple years, I'm planning on reinvesting all the profits, however, I would eventually like the ability to use part of the profits to fund a 401K for my wife. My understanding is that if she is a member of the LLC, then we can avoid paying employee related taxes (social security, unemployment). However, if I go down that route, then I'll need to file a K-1. Is there a way to eventually set up a 401k for her without incurring the additional effort to file a K-1 every year?

Is it true that if I request an EIN, then I will need to file a K-1? My priority is liability protection first, so I'd opt to go down that route if there are various ways I could proceed on this. However, minimizing the amount of time I need to file taxes for this LLC is a "nice to have."

Thanks for your feedback.


EricMA

  • 5 O'Clock Shadow
  • *
  • Posts: 20
  • Age: 34
  • Location: Massachusetts
Re: Setting up a new Real Estate LLC: Questions on Structure and Tax Reporting
« Reply #4 on: December 07, 2014, 12:00:49 PM »
You do not need to file a K-1 just because you have an EIN. In fact, you can get an EIN as a true sole proprietorship (no LLC or limited liability.).

If you want to try to involve your wife for retirement and investment purposes, I think it would be a LOT easier and cheaper to suck it up and do the K-1 each year than it would to go through all of the employment paperwork and hassle.

I'm pretty sure TurboTax has an add-on that will make K-1s for you based on your company books. You might even be able to import some data if you use QuickBooks, but I'm not so sure how well that works or how advisable it would be. They probably get around $100-$200 for that particular service. If your books are simple, it will be cheaper to do that than pay an accountant to prepare your K-1s for you.

The Mobile Mustachian

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Hello everyone,

Thanks for your advice. I've decided to go the route of setting up a LLC and requesting an EIN. I'll be filing the paper work shortly. I have a question regarding local taxes. My registered address will be in another municipality than my physical address. Both municipalities tax the gross receipts of businesses. Would I pay this tax to the municipality in which I live or where the LLC is registered?

Thanks for your feedback

jackiechiles2

  • Stubble
  • **
  • Posts: 124
Your LLC is a separate "person" from you, so you would likely pay the tax in the municipality where you've registered the LLC.

One thing I should point out, if your goal is protection of personal assets, be sure to keep your LLC's finances separate from your own personal finances.  This is best done by setting up a separate bank account for the LLC.  Failing to keep your person separate from the LLC could lead to a claimant "piercing the veil" and coming after your personal assets. 

Cpa Cat

  • Handlebar Stache
  • *****
  • Posts: 1698
I've decided to go the route of setting up a LLC and requesting an EIN. I'll be filing the paper work shortly.

Just use this link for your EIN. Seriously... that other guy was right - 10 seconds. No papers.

https://sa.www4.irs.gov/modiein/individual/index.jsp