6 Questions to Help You Identify the Best Business Structure


This post is in: Blog, Business, Real Estate
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One of the most common questions we get at USTaxAid is, “What’s the best business structure for me?”

Here are some questions that you need to answer first.

  1. Will you hold assets that you expect to appreciate? If that’s the case, you’ll want a single-member or multi-member LLC that takes a disregarded tax status. The corporation is not your friend.
  2. If you have real estate, are you planning to flip it, wholesale it or otherwise hold it for a short term? If that’s true for you, you probably want to use an S Corporation, assuming you qualify.
  3. Will there be any partners that are foreign nationals? If so, you can’t use an S Corporation. Depending on what you’re doing and what country they are from, you will want to use a limited partnership, LLC or C Corporation.
  4. Do you expect to take your company public? You need a C Corporation to go public.
  5. Do you provide a professional service through your company? You probably want to avoid the C Corporation because you might get hit with the professional service corp penalty. The S Corporation is usually the best.
  6. Do you need to take advantage of C Corp-only benefits like Medical Expense Reimbursement Plan? Check first to make sure the C Corp is the best for other reasons, but if you need good benefits the C Corp might be best for your business.

The right business structure will protect your assets and save you on taxes. The wrong business structure can be a nightmare that costs you time and money. Check with an experienced CPA before you make the final decision.


3 Comments

  1. Norman says:

    Thanks Diane for your input. The alternative might be to roll the entire property into a Trust, thereby gaining a degree of liability protection. Then wrap under a business LLC, the “”part-time” vacation rental business of the Guest House., At least we are swapping the liability of a sole proprietorship and personal ownership of the property as a whole, for the protection of a Trust and business liability under a focused LLC. I know this State recognizes Trust ownership of property being the principal residence of the owner within its “homesteader” parameters. Using a family Guest House for income generation when not otherwise being used for extended family visits is a very common way for elderly people to supplement retirement and social security income. Wading through the liability and tax minefield is a challenge, but will become a more frequent survival mode for older Americans as time goes on. We just need a workable template to offer them. More and more of my clientele fall into this category. -Norm

  2. Diane Kennedy says:

    Great question, Norman. I’m inclined to be cautious here. If the property isn’t split into two, then the LLC could be considered to own both. If the guest house is a business (ie, a rental), then it’s a business LLC and we’ve just lost principal residence tax breaks for the main house. There might be a “wink wink” agreement that the local assessor won’t care, but what if someone new comes in the job? And the feds may not recognize the local authority and decision, which is where the real risk is.

  3. Norman Long says:

    I have a client who owns personal property in Texas with a guest house on it. She rents the stand-alone Guest House for short-term weekenders in her rural vacation community. As personal property and as a senior citizen she gets various benefits from the state; homesteader treatment where creditors can’s touch her property, and senior discount on property tax. She reports the Guest House as a rental business on Sch.E. It’s a very profitable income business, and the depreciation on the Guest House is tracked at cost given it was built on an existing foundation for a building already there when she bought it. The depreciation has also allowed her to in effect delay taxes on her withdrawal of her IRA and make her so far tax-neutral. If she were to structure the Guest House as an LLC, there is some question whether the total property would remain listed as Homesteader exempt. We are told by the County Assessor they would approve it in this “good-old-boy” system in Texas. This property given her age is in the process of being included into her Legacy (Generational) Trust being set up. My take is to convert if legally possible the Guest House and rental business into an LLC first and then role the LLC into her Trust. You can’t subdivide the land. What is your take?

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