LLC or S Corp

client purchasing commercial building looking to put in entity to mainly protect building from any creditors that may turn up

LLC or S Corp

your thoughts please

Thank you

From the legal side, an S Corp is a tax entity not a legal entity. You probably mean "LLC or corporation."

From the tax side, it's not a good idea to put appreciating assets inside of a corporate tax entity, S or C.

LLC, either disregarded or partnership, is usually best.

S corp status would subject all cash and property distributions to reasonable comp tests and income recognition according to FMV. Holding through an LLC that doesn't elect S corp status would cause the owner to be treated as self-employed. No SE tax on rental income, no FICA taxes possible, and distributions (if a partnership) aren't taxable unless in excess of basis.

Little bit of a different situation, but my client's partnership dissolved - he now owns all of it. The partnership includes land/bldg. occupied by the business. Land/bldg. was purchased/built by the partnership. Now that he is a sole proprietor, he wants to form an LLC and be a disregarded entity. Should be land/bldg. be owned by the LLC or by him individually? (There is an SBA loan on the land/bldg.)

What if he later decides to elect S-corp status - usually sec. 351 means that ALL the assets of the business move into the corp. So does that change your recommendation for now?

Separate LLCs for the real estate and for the operating business. The operating business "rents" from the holding LLC, but since both are disregarded, nothing occurs on the 1040 tax return. But if the operating business opts for S-Corp taxation, then the rents paid are deductible on the 1120S, and the rents received are income on the 1040 Schedule E. There are some weird rules about self-rentals (passive income is recharacterized as nonpassive, which is different than active; 199A stuff), but at least this follows the maxim of never holding real estate in a corporation.

All these years of training to no avail....

NEVER EVER NO NOT EVER put real estate to be held inside a corp of any kind. It's malpractice. An LLC is fine for legal protection....don't elect anything beyond that.

EVER.

Thank you I know that but the problem I have is the client purchasing the property is anticipating substantial judgements against him from lawsuits and trying to protect the property from judgements

What about putting the property in a irrevocable trust or an LLC owned by the irrevocable trust

thanks for your thoughts

What makes you think that the LLC will be less effective in sheltering the property than a corporation? For that matter, what legal protections would either structure actually afford in the first place? In either case, the client owns the shares to the company. What would stop the judgment from attaching to the shares?

An irrevocable trust may have the effect of preventing the seizure of property because the grantor no longer has any rights to the property. But if that's the only goal, then it doesn't matter if the trust holds the property directly or through an entity such as an LLC or corporation.

The most important consideration of all is that as a CPA, you aren't even in a position to advise your client as to how to avoid having his property seized from him. Have him consult a lawyer.

The client in an LLC does not own any shares, rather they are members!

This is quite important as shares of stock appear to be the mainstream of most litigations!

I recall back when I was CFO of a major NYC labor union that owned real estate and were subject to fines and penalties under the Taft Hartley Act for members strikes which specifically stated that seizures of company stock in real estate were available for forfeiture as one of the available assets.

So when we sold our existing real estate and purchased new properties we immediately set up our new real estate entities as LLC's to circumvent this specific issue!

So you're really posing a legal question under the guise of a tax question. You/he need to know the LLC statute in that state. In IL, it's real simple, the LLC statute is about two lines saying that an LLC member is deemed to have identical liability protection as a corp shareholder. I suspect many others are the same. You just need the attorney to understand that you just don't put real estate into a corp....they love corps.

My previous post was solely in reply to JoanTB.

Looking at the original question, it looks like you are trying to shield the asset from the owner's creditors. Organizing as an LLC or Corporation will not accomplish this. Whether you call the ownership interest "shares" or "membership", it is still available to be executed against. The purpose of an LLC or corporation is to shield the owner from the debts of the company, not vice-versa. (However, I think it does accomplish the objective that the building can't be liened or sold by force, depending on the relative value of the debt and the company; instead, a judgment creditor might only get an ownership interest in the company, and might even become the majority member or sole member.) A trust might or might not accomplish what you are looking for, but as others have stated, this is a legal question, not a tax or accounting question.

What if he later decides to elect S-corp status - usually sec. 351 means that ALL the assets of the business move into the corp.. I don't know what usually happens, but I know that's not a 351 requirement.

Belize Trust - can't touch it