Business and entity
Most entity questions are cheap to answer at formation and expensive to answer afterwards. Real property is the clearest example.
Holding real property in the wrong entity
Placing appreciated real property inside an S corporation is difficult to undo. Distributing that property out of the corporation is generally treated as a sale at fair market value, which can trigger gain even though nothing was sold to anyone. Partnerships and limited liability companies do not carry the same problem.
This is worth deciding before the deed is recorded. It is one of the few tax mistakes that gets more expensive every year the property appreciates.
California entity costs
California imposes an annual minimum franchise tax of $800 on most corporations and limited liability companies doing business in the state, regardless of profit. Limited liability companies pay an additional fee based on total California income once receipts pass certain thresholds.
For owners running several single-property entities, those fixed costs compound, and the right number of entities is a real question rather than a formality.
Planning before the year closes
Most of what changes a return is decided before December 31. Once the year has closed, the work is reporting rather than planning.
For owners whose income moves with property sales, that means the conversation about a sale should happen before the escrow closes, not at the following April.
Common questions
- Should I hold rental property in an LLC or an S corporation?
- For appreciating real property, a limited liability company or partnership is usually the more flexible structure. Property distributed out of an S corporation is generally treated as sold at fair market value, so gain can be triggered without a real sale. The right answer depends on liability, financing, the number of owners, and what the property is for, and it should be settled before purchase.
- What is the California $800 franchise tax?
- It is an annual minimum tax imposed on most corporations and limited liability companies registered or doing business in California, payable whether or not the entity is profitable. Limited liability companies may owe an additional fee based on California-source total income.
Start with a conversation
Tell us what you are working with and we will tell you whether it is something we handle.