Before making any decisions it is recommended that you talk with a tax consultant to make sure that the decision you are making is a wise one. Once you do decide on the final corporation you might want to consider the disadvantages and advantages with each class of corporations you will be dealing with.
Let’s dive into the differences between an S-Corporation and C-Corporation. To start off, the primary difference lies in the fact that S-Corporations are considered entities wherein the profits and losses from the investments are reported on the business owner’s income. While on the other hand, C class corporations are taxed on a corporate level.
When you place your rentals in an S Corporation or C Corporation, your decision will be dominated by how you want to be treated in terms of federal income taxes. In the case of C Corporations, they are separately taxable entities. Here, they will file a corporate tax return and taxes will be paid at the corporate level. Moreover, you will be faced with double taxation if the corporate income is distributed to owners as dividends, which will definitely be considered as personal income and will be taxed accordingly, that is, tax will have to be paid first at the corporate level and then at the individual level on the returns on each individual investment. The situation is a bit different for S Corporations. They are considered pass-through tax entities as they file an informational federal but no corporate-level income tax is paid. Therefore, taxes are passed down to the individual level owners and paid by them. Long-term rentals should be held in a LLC. S corporations are for short-term holdings.
Let’s look into how S and C Corporations are classified:
- S Corporations are limited to less than 100 shareholders in addition to the fact that the shareholders must be US citizens or residents. These restrictions do not exist for a C Class Corporation and the shareholders can be foreign.
What are the benefits?
By holding your property with an S-Corporation, your sales will be qualified. Moreover, you will be required to report income on your tax returns. C Corporations are known for having several advantages too. For example, you will have a separate legal identity and there is limited liability for the owners. Moreover, there is a significant separation between ownership and management. Furthermore, the shares are readily transferable. Finally, there are well-established legal precedents, an ability to offer stock options and you have well-established corporate law behind everything and will offer all the advantages that come with it.
Which is the best for your rentals? Choosing between either of these corporations will dictate how your rental incomes move forward and how they are taxed. From the two strategies above it is important you talk to a tax consultant in addition to keeping your mind open for other strategies to maximize the benefits. As mentioned earlier, LLCs are best for long-term holds.0