A common question among many real estate investors I meet is “should I form a C corporation or an S corporation for my short term investing (short term investing is commonly viewed as fix and flips, wholesaling, or just about any investing that does not have an investment intent.)? My standard answer is almost always a C corporation.
I am sure many of you are thinking that an S corporation is preferable because, according to some myth, it will lower investors’ taxes. The arguments in favor of an S corporation are persuasive. Two of the most common are as follows:
- The S corporation does not get doubled taxed and are flow through entities.
All income or losses of the S corporation flow through to the shareholders’ return each year based upon ownership percentages of the shareholders. The recipient shareholder pays tax on his share of the flow through income. A C corporation, in contrast, must pay taxes at its own rate on its net income. Any after-tax profits distributed to shareholders will be taxed again as dividend income to the shareholder – hence the “double tax”.
- The S corporation will save on social security taxes.
Each individual must pay 15.3% employment taxes on their first $106,800 in active earnings. On amounts above $106,800, the tax drops down to 2.9% for the Medicare portion (technically, your employer pays one half of the tax, but when it is your business, it is still your money whether it comes from your business or from you individually). The savings in an S corporation are achieved when you split your corporate earnings between salary, which is subject to employment taxes, and distributions, which are not subject to employment taxes.
Given the potential tax savings, why would anyone choose C corporation tax treatment?
Consider two arguments in favor of a C corporation: (Click here to continue reading my post on Bigger Pocekts)