LLC vs. S-Corp for Real Estate: Which Business Model Works Best? (2024)

Many rental property owners begin their real estate investment journeys as sole proprietors. However, as their portfolios start to grow, they eventually decide to convert their rental businesses into LLCs or S-Corps for liability and tax purposes.

Establishing your rental business as an LLC or S-Corp protects your personal and business assets from common liabilities, such as credit issues and lawsuits. LLCs and S-Corps also enjoy certain tax benefits that lower your tax responsibilities, allowing you to keep more of your rental income.

Whether you own and operate a series of multifamily units or lease office space, it’s important to understand how the legal structure of your rental business impacts your liability and tax obligations. In this blog, we’ll discuss why you need to convert your rental business into an LLC or S-Corp, the pros and cons of each, and how to decide between the two legal structures.

Why convert your rental business to an LLC or S-Corp?

When scaling a rental business, it's important to consider how different business structures can protect your real estate assets and minimize your liabilities as a property owner. Most real estate investors transition from a sole proprietorship business structure to an LLC business structure to protect their assets and minimize personal liability.

Investors can also choose to be taxed as an S-Corporation or another tax classification, depending on their needs. It's important to note that an S-Corp is not a business structure, but rather a tax classification that requires businesses to operate in a certain way. We'll explore the requirements for an LLC and S-Corp in more detail below. Let's first touch on some of the pros and cons of sole proprietorship.

Tax benefits of sole proprietorships

Sole proprietorships make sense for property owners who have just started their real estate investment journey and have one or two properties in their possession. The main reason rental owners operate as sole proprietorships is the capital gains exclusion provided by the IRS.

The capital gains exclusion states that if a sole proprietor, (in this case, the rental owner) has lived in the home for at least two of the last five years before selling it, they can benefit from a $250,000 tax exclusion if a single and $500,000 if married.

Rental owners are also exempt from self-employment tax as long as the income generated from the property is passive. This means that you wouldn't have to pay taxes on the rental income you generate from short-, mid-, or long-term tenants. However, you would have to pay taxes on the home if you were to renovate it and sell it to a new owner. Self-employment taxes can eat up as much as 15.3% of your income, so it’s best to avoid them whenever possible.

However, it’s not advised to stay as a sole proprietorship for too long. Rental owners with a sole proprietorship have much less liability protection than owners with an LLC or S-Corp classification.

Liability concerns of sole proprietorships

Sole proprietorships operate under a rental owner’s individual Social Security Number, making you responsible for all liabilities incurred on your properties. Since there’s no separation between your finances and the finances of the real estate business, a tenant can sue you directly as opposed to your real estate business, which puts your financial stability and the future of your rental business at risk.

Most real estate investors eventually decide to move away from a sole proprietorship and towards an LLC business structure and/or S-Corp tax classification. This allows investors to establish their rental businesses as individual entities, helping them keep their personal and rental finances separate. LLCs and S-Corps also come with their own set of tax advantages.

What is an LLC?

An LLC (Limited Liability Company) is a legal business entity that protects a business owner’s assets from their company’s debts and liabilities. LLCs can be owned by a single member or multiple members depending on how many people own the business. As an LLC, your rental business enjoys more liability protection than sole proprietorships and less profit-sharing restrictions than corporations. It’s a convenient way to structure a small to medium-sized rental business because it offers asset protection, flexible tax options, and anonymity.

What is an S-Corp?

An S-Corp (Subchapter Corporation) is not a legal business entity but rather a specific tax classification that exempts business owners from double taxation. Double taxation occurs when company profits are taxed at both the corporate and shareholder level. Property owners with an S-Corp tax classification do not need to pay corporate income tax. Instead, their company profits pass through an owner’s tax returns. You can establish your rental business as an LLC and classify it as an S-Corp for tax purposes. This allows you to become a company employee, potentially lowering your taxable income.

What are the key differences between an LLC and an S-Corp?

Before establishing your rental business as an LLC or an S-Corp, you’ll want to understand what the key differences are between the two classifications. LLCs and S-Corps mostly differ based on taxes, ownership, business operations, and fees. We'll break down each of these differences below.


As mentioned above, an LLC is a legal business structure and an S-Corp is a tax classification. Qualifying rental owners can establish their rental business as an LLC and elect S-Corp taxation with the IRS. All you would need to do is fill out a form and follow the rules associated with S-Corp taxation.

Unlike S-Corps, LLCs don’t have their own IRS tax category. Instead, LLCs are taxed as sole proprietorships, partnerships, or S-Corps. An LLC with one owner is usually taxed as a sole proprietorship and an LLC with multiple owners is taxed as a partnership.

However, regardless of how they’re classified, LLCs benefit from pass-through taxation. This allows for rental income, losses, deductions, and credits to “pass through” the business and be taxed at the owner’s or owners’ personal income tax rate instead of having to pay corporate taxes. As a result, LLCs avoid double taxation and can keep more of their rental income.


LLCs are allowed to have an unlimited number of owners, commonly referred to as “members.” These members may be U.S. citizens, non-U.S. citizens, and even non-U.S. residents. S-Corp ownership is much more regulated.

The IRS doesn’t allow S-Corps to have more than 100 principal shareholders or owners. Additionally, S-Corps cannot be owned by individuals who are not U.S. citizens or permanent residents. Lastly, S-Corps cannot be owned by any other corporate entity, whether that be an LLC, sole proprietorship, partnership, or C-Corp.

This means that if you classify your LLC as an S-Corp, that LLC cannot be acquired by a larger rental company without losing its S-Corp tax classification.

Business operations

LLCs and S-Corps also differ greatly in terms of how they are managed. LLCs can be managed by either their owners or designated managers. S-Corps, on the other hand, are required to have a board of directors and corporate officers, such as a CEO, CFO, and CMO. S-Corps are also legally required to adopt corporate bylaws, conduct initial and annual shareholder meetings, produce company meeting minutes, and follow extensive stock issuing regulations.

LLCs are only required to adopt an LLC operating agreement, which can be set up however its owners prefer. There’s no need to hold shareholder meetings or record meeting minutes. While LLCs are encouraged to follow the same business guidelines as S-Corps, they aren’t legally obligated to do so.


Lastly, LLCs and S-Corps pay different incorporation fees. It costs about $500 to set up an LLC, which includes:

  • Articles of Incorporation fee.
  • Annual reporting fees.
  • Attorney fees to draw up legal documents.

Incorporating an S-Corp is usually more expensive because of its complexity, and set-up costs can range from $800 to $3,000, depending on your state. In addition to the fees required to set up an LLC, S-Corps also require:

  • Financial reporting fees for accounting and taxes.
  • Insurance costs.

How to decide between an LLC or S-Corp for your rental business

As you can see, you don’t necessarily need to choose between an LLC or an S-Corp for real estate. Many real estate investors establish rental businesses as LLCs and claim S-Corp taxation if their businesses meet S-Corp taxation requirements. However, if you’re just starting out as a rental owner or plan to keep your rental business within the family, an S-Corp classification may not be necessary.

While the S-Corp classification provides greater tax benefits, it’s also more expensive to establish and requires the outsourcing of professional services via lawyers and accountants. This may not be worth it for a real estate investor with just a couple of properties under their belt.

An investor with a sizable property portfolio and multiple employees, however, are far more likely to reap benefits from S-Corp classification. Chances are the money they would be saving as a result of their S-Corp status would far exceed the money they'd be spending to incorporate.

Establishing your rental business as an LLC is the simplest and most cost-effective way to protect your personal assets as a property owner. Whether or not you declare your LLC as an S-Corp will ultimately depend on the size of your company, its management structure, and how much money is being generated through rental income.

Important Note: This post is for informational and educational purposes only. It should not be taken as legal, accounting, or tax advice, nor should it be used as a substitute for such services. Always consult your own legal, accounting, or tax counsel before taking any action based on this information.

LLC vs. S-Corp for Real Estate: Which Business Model Works Best? (2024)


Is it better to hold real estate in LLC or S Corp? ›

For some real estate investments, it is highly recommended to use an LLC and an S corporation at the same time, with the LLC holding the property and the S corporation managing the business. This strategy shall offer real estate investors both the asset protection of an LLC and tax benefits from an S corporation.

How do I decide between LLC and S Corp? ›

The biggest difference between S corporations and LLCs is how they are taxed. S corporations are taxed as pass-through entities, meaning that the profits and losses are passed through to the shareholders' personal tax returns, while LLCs can choose to be taxed as either a pass-through entity or a corporation.

Why would you choose an LLC form over a partnership or an S corporation? ›

You may prefer an LLC if you: want a high degree of management flexibility in running your company. want to allocate profits and losses based upon criteria other than ownership percentage. prefer to avoid the state-mandated requirements imposed on corporations, such as annual meetings.

What are the disadvantages of an LLC for real estate? ›

Using a real estate LLC can come with disadvantages such as tax complexity, setup challenges, transferred tax obligations, lack of guaranteed asset protection, financing difficulties, and increasing expenses.

Should a realtor set up an S corp? ›

If you earned $100,000 (net) as a sole proprietor real estate agent, you'd pay 15.3% on the full $100,000 ($15,300). But, after forming an S-Corp, you pay yourself a salary of $50,000 and only pay the 15.3% tax on your salary ($7,650). In this example, forming an S-Corp halves your self-employment tax liability.

What is the best business type for real estate? ›

Limited Liability Companies (LLCs)

In fact, many experts will always recommend that real estate investors use LLCs for their real estate investments. However, whether an LLC is appropriate for your investment is still a personal decision.

At what point should I switch from LLC to S corp? ›

In general, you'll want to consider electing S-corp tax status for your LLC if your business is generating sufficient profits to pay a reasonable salary to the members and annual distributions.

Should my startup be an LLC or S corp? ›

The S corporation is ideal for most small businesses. An LLC, or limited liability company, offers the same personal liability shield to each of its owners that a corporation offers. The LLC is essentially an organized partnership offering the same protections as corporations, but with much more flexibility.

Should I file as a single member LLC or S corp? ›

If you form an LLC without electing S Corp taxation, you could have a higher tax bill. The IRS taxes an LLC as a sole proprietorship by default, which includes self-employment tax on all of your business's profits. Electing S Corp status for your LLC could reduce the amount of income subject to self-employment tax.

What are three things that LLCs are not required to do? ›

LLCs are not required to do three things: hold annual meetings, keep minutes, or file written resolutions. When it comes to operating flexibility, Limited Liability Companies (LLCs) enjoy certain advantages over other business structures.

Does an S corp need a board of directors? ›

An S corporation is a type of business entity that offers certain tax benefits. In order to qualify as an S corporation, the business must meet certain requirements set forth by the IRS. One of the requirements is that the business have a board of directors.

Why choose partnership over S corp? ›

Partnerships and S-Corporations have a great deal of similarities and are not subject to a corporate level tax. Partnerships offer a greater degree of flexibility, however, someone used to a regular paycheck and the withholding that goes along with it can get frustrated.

Should you use an LLC to invest in real estate? ›

Bottom Line. Overall, starting a real estate LLC is a good idea if you're looking to move into serious real estate investing. It will offer you far better liability protection than operating as an individual or sole proprietor. It also provides superior tax benefits than an S-corp or C-corp.

What are the risks of an LLC? ›

LLC disadvantages
  • Limited liability has limits. A judge can rule that an LLC structure doesn't protect your personal assets. ...
  • Self-employment tax. If an LLC is taxed as a partnership, the government considers members who work for the business to be self-employed. ...
  • Consequences of member turnover.
Mar 11, 2024

What is the benefit of an S corp for real estate? ›

Property owners with an S-Corp tax classification do not need to pay corporate income tax. Instead, their company profits pass through an owner's tax returns. You can establish your rental business as an LLC and classify it as an S-Corp for tax purposes.

Should I put my rental property in an S corp? ›

Some landlords prefer to form an S corp for rental property management for many reasons. Not only does an S corp limit the landlord's personal liability in a property rental situation, but it also can reduce costs at tax time.

Can I live in a house owned by my S corp? ›

Having the S corp own your residence may sound like a great way to get free housing, but it's likely to attract attention from the IRS. Whether you are the only shareholder or one of many (up to the limit of 100 allowed) living in a house owned by the company is reasonably construed as income.

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