People frequently ask what is the number one tax question I get? Inevitably, whenever I speak at a seminar or to any group, the requested topic is “How do I structure my business and/or investments?” Not only is this the most common question, but it is also the most important for any business owner or investor. Why? Because it is the foundation of any good tax strategy.
The other evening, I was speaking at an AZREIA seminar for people who fix and flip real estate. AZREIA is a terrific organization that provides a wealth of education for Arizona real estate investors. Go to http://www.azreia.org. I began the presentation by asking what topics they would like to discuss. As usual, the first response was about how to structure their investments.
So, here is the answer. IT DEPENDS. I know it sounds like a bit of a cop out, but it's true. Every investor has different objectives and needs an entity structure that is specific to their needs and goals. Of course, there are three primary types of tax entities – Sole Proprietorships (which really are not entities at all and should only be used in extremely limited situations due to the usually negative tax consequences), Partnerships (both general and limited), and corporations (both S corporations and C corporations). As I explained at AZREIA, there is no such thing as an LLC, or limited liability company, in the Internal Revenue Code. Instead, taxpayers are allowed to elect the tax treatment of an LLC. (I'm constantly amazed at how many tax professionals and attorneys do not understand this rule.)
My advice? See your tax advisor to determine the right entities for you based on your personal income tax strategy.