For federal tax purposes, S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders. An S corporation is a small business corporation. When forming your corporation, you can choose whether it will be taxed as an S corp or a C corps based on state laws. An S corporation is simply a regular corporation or other legal entity with a special tax classification. While this tax classification provides benefits to individual taxpayers on pass-through income, an S corporation is still subject to the same tax rules as a C corporation when it comes to property. This is especially true if a company is attempting to transfer ownership of a property.
If you are in the business of flipping houses, running a professional practice, or construction, S corporations can be a great entity to have. They offer excellent asset protection and may assist you in reducing self-employment tax
How Does an S Corporation Work?
In many ways, an S corp functions similarly to any other corporation. It establishes a board of directors and corporate officers, by-laws and a management structure under the laws of its home state. It distributes company stock and its owners cannot be held personally or financially liable for creditor or company claims. S corporations are distinguished by the fact that they are not federally taxed on the majority of their earnings and distributions, allowing more money to be passed on to shareholders.
How to Create an S Corporation for Your Rental Properties?
Register Your Business
The first step in forming an S corporation is to register with your company. The company name must be distinct. A small fee, which varies by state, is usually required for registration and name reservation.
Select a Province
You must decide which province you will create the S corp in. This is a simple decision for most landlords. If you live in the same province as your rental property, incorporating is much easier and less expensive. If you want to become a property owner in another province or the province where the property is located, the process is more complicated. The option you choose will be determined by the number of properties you own and whether you intend to purchase additional out-of-state properties in the future.
File the Articles of Incorporation
The third step in the S corporation business registration process is to file articles of incorporation in the state where you are registering the business. You will submit the articles of incorporation via mail or online once you have provided all the necessary details.
Transfer the Property to the Corporation
If you intend to become a property owner soon but have yet to purchase property, you should think about incorporating before making your first investment. If you already own rental property, you must transfer the title to your corporation to gain liability protection and keep your personal funds safe. The ease of transferring the property depends on your mortgage. Some mortgages include a due on sale provision that requires you to pay off the mortgage when you transfer titles.
Learning how to protect yourself from liability is an important part of being a landlord. Property owners face a variety of risks, but liability is usually the most concerning. Whether you're just starting out as a landlord or have years of experience, incorporating will give you the liability protection you need to protect your personal funds. For more information, reach out to Edmonton Home Pros. We are your answer to all things real estate.Posted by Stephen Lau on