First, it is important to understand there are three types of business structures:
- S Corporation: This is a private stock company that has pass-through taxation (meaning the taxable earned income will passed through to the owners who are taxed at their individual tax rates, rather than the tax rate for corporations). This is a good structure for active business and real estate activity (like Flipping) because investors can avoid some of the self-employment taxes as would be incurred in an LLC. These businesses must be owned by individuals or partners, not another entity. Owners must be paid a "reasonable compensation" (based on local market) if there is enough profit.
- C Corporation: These companies pay corporate tax rates instead of the capital gains rates paid by individuals. It is well matched for active business and real estate activity if there is foreign ownership or owned by something other than an individual, such as an entity. As in an S corporation, the owner/manager must be paid reasonable compensation.
- Limited Liability Company: An LLC is a flow through entity so earned income is taxed at individual rates. The structure protects the owner's/owners' assets. This is a great passive real estate investment structure because real estate does not trigger self-employment taxes (unless an active business activity takes place). Visit Limited Liability Companies for more information.
Choosing which structure will affect management, taxes, investors and loans. Carefully review your options with a qualified professional to determine which option is right for you and your business plans.
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