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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22702
Experience:  Taxes, Immigration, Labor Relations
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Im trying to find out what would be the best business entity

Resolved Question:

I'm trying to find out what would be the best business entity for a first time real estate investor business from a tax point of view.
Submitted: 10 months ago.
Category: Tax
Expert:  Lev replied 10 months ago.

Lev :

Hi and welcome to our site!
As a starting point - and to keep paperwork as simple as possible and avoid additional overhead - you may start without creating a separate business entity - just acting as physical person.

Customer:

Ok. Just to ask is there a reason or benefit to that. I also fail to mention I want to get into commercial property.

Lev :

As your activity will advance - and you will have substantial profit - you may head into more complex business structures.
For instance - if you want to use a separate name for your business activities - you would register DBA - "doing business as" - or fictitious business name - and will officially use that name for your business activities - still from tax prospective - you will continue to act as a physical person.

Customer:

Ok. So does it really matter if you have a business entity or not because there is "great legends" that a business entity will provide taxs benefits and asset protection.

Lev :

If you want to protect your personal assets - you may make one more step - and create an LLC in your state - so your real estate investor and business activities will be in that LLC.
From income tax prospective - a single member LLC will be disregarded entity - means - all income, deductions, etc will be reported on your personal tax return.
However - the LLC is a separate legal entity - and it may own properties, will be liable for real estate taxes, sales tax, may have a bank account, etc.

Customer:

A business created by my mother and me will that be considered a single member llc or not.

Lev :

The LLC does provide some level of protection for your personal assets. For instance - if someone sue and obtain a judgement against the LLC - your personal assets may not be garnished, but assets owned by the LLC are not protected.

Lev :

If the LLC will have several members - it is generally treated as a partnership.

Customer:

Ok. That make sense. Ok. So just to get a better understanding or just to refer back my question in my situation would the llc make sense or just do personally for now.

Lev :

A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation.

Customer:

Ok. If I'm not mistaking the corporation standpoint is the best way to go for tax purposes.

Lev :

If no choice is made - the LLC would be treated as a partnership. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Partnership should issue schedules K-1 to each partner reporting pro-rata share of net taxable income (or loss) - http://www.irs.gov/pub/irs-pdf/f1065sk1.pdfSome additional information about partnerships may be found in IRS Publication 541 - http://www.irs.gov/publications/p541/index.html


All business income and expenses are reported on the partnership tax return form 1065 - http://www.irs.gov/pub/irs-pdf/f1065.pdf
How income is divided between partners is based on the agreement between partners.


A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

Customer:

Ok.

Lev :

There is no "best" way - as all depend on circumstances - and some are belong our control.
For instance - with C-corporation - there are two levels of taxation - on corporate level and for shareholders on dividends - so if you want to re-invest earning back into business corporation might provide some tax saving, but if you want most of earning to be distributed to shareholders - they will be taxes twice.

Lev :

As you just starting and do not really know how things will do - you better to keep your business structure as simple as possible - as avoid additional overhead.

Customer:

Ok. Make sense.

Customer:

Ok so personal is the way to go.

Lev :

Appreciate your understanding.

Lev :

I would say - that is the way to start.

Customer:

Ok fair enough. Appreciate it sir.

Lev :

You are welcome.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22702
Experience: Taxes, Immigration, Labor Relations
Lev and other Tax Specialists are ready to help you

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