First, it is important to understand there are a couple types of business structures available to you:
- C Corporation – These type of company 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 an entity other than an individual. As with a S corporation, the owner/manager must be paid reasonable compensation.
- Limited Liability Company – An LLC is a flow-through entity where 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.
- S Corporation – Although an acceptable structure for a business, it is not a recommended vehicle to place within a self-directed IRA due to the increased exposure to prohibited transactions.
Choosing one structure over another will affect type of management, taxes, investors and loans.
All examples are for educational purposes only, and should NOT be construed as investment advice. Always contact a qualified tax attorney or advisor prior to making any financial decision.
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