Mark Kohler explains why small business owners should use two LLCs: one to hold assets and rentals, another to operate the business. This structure isolates liability, but the operating LLC faces full self-employment tax unless you convert it to S-Corp status, which requires paying yourself a reasonable salary.
Chapters
Let's go back to our trifecta. So over here are assets. In our example we have our little Tennessee llc. We have a rental property, it's a holding company holding assets. Over here we have our little LLC for our new business or side hustle. This new realtor that's out in California has this llc. Any profits they take out and they pay for expenses out of that LLC over here we're collecting rent, we're paying expenses over here and we're taking profit over here. Two different businesses, two different purposes. We do not want the same LLC doing both because we want a wall down the middle, we want protection. Now what's going to happen over that's a problem is this LLC is going to start making money and the owner is going to pay self employment tax, 15.3% on all the profit. You're not saving tax with that llc. That LLC is for holding the business operations. But you get all the same write offs you would even if you didn't have an llc. So this LLC can seem like a problem. Well, what's the solution? We're going to convert this LLC and that is an LLC taxed as an S Corp. So if I'm starting to make more and more money and I notice that I'm going to have a huge tax bill, I got to get this S Corp thing going. Here's why. When you start to make money in this S corp, there's no self employment tax. And even though it's a corporation, there's no corporate tax. What? Super cool, right? Well there's a catch. You do have to take a salary. But we do also create a lot of savings. The main reason for this type of LLC is so that we can save on the self employment tax.
