A couple accounting questions...

A general question on LLC vs S-Corp, and a couple specific accounting questions arise out of a business we intend to start. Specifics are:

Myself and 1-4 others will partner. Unsure yet of my percent ownership, but probably in the 50% range.

The business will purchase and flip homes. Short duration, don't really want to hold long unless forced to.

Here's where it gets interesting. Another person that is not an owner (but wants to buy in as soon as he makes some money) has agreed to be responsible for all labor for the flip, and take 1/3 of net profits. $0 on a loss. The corporation will cover all costs for materials.

1/3 net profits reinvested in company, 1/3 in dividends. Although how these 2/3 are done (maybe all reinvested?) is flexible based on if there are different ways to structure these that are more beneficial for tax reasons, accounting reasons, or reasons I don't understand, that I would also appreciate insight on.

Another important thing is that I will maintain my rather comfortable salaried job, which has some stock options. And I *may* be able to sell some stock options this year for a big (to me) profit. I've had an S-Corp in the past in which I had 100% ownership that unfortunately didn't do so well, so the fact that the losses fell through to my personal tax return and I got most, if not all, of the tax that was take out of my paycheck during the year, was a *very* nice thing. So it is important to me to be able to offset some of my personal tax liability (of my salary or sale of options) with an operating loss in the company (which I expect will happen the first year given the purchase of tools, startup costs, legal fees, etc etc, especially if we purchase a house prior to Dec 31, and don't realize the gains until the 2007).

So... bearing all of that in mind... is an S-Corp, and LLC, or some other organization the best way to go?

Also, do I expense the 1/3 for the non-partner laborer as labor in the books, or do I have to do it some other way?

And is it better to have the company rent office space from me since it is run out of my home, or is it better (for me personally) to claim that

1/4 of my home is used for a business.

Any other input in general would be appreciated as well...

Thanks

Nathan

"Nathan" wrote

It doesn't matter much, but I'd suggest "S" corp route as you avoid social security and medicare tax on "S" profits but not on LLC profits. Course, if it's a loss you don't have to worry about taxes but basis, as losses would only be deductible up-to your basis in that business.

Now, under either form of business you are taxed on the profits regardless of whether you take that amount out of the business or not. And, those profits are going to be ordinary income regardless of how long you held the house (time from purchase to sale).

Also, your purchase of a house does not create a currently deductible expense. All you are doing is buying an asset that is commonly thought of as "inventory" much like GM buys steel and other stuff to make cars. You do not get to claim a bulk of your expenses until the house sells.

Under an "S" form of business I would have you either issue a 1099 or W-2 to the worker/employee that is a shareholder.

Of course operating expenses (office and administrative) get deducted as they are paid out.