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| CRE Online > Real Estate Law > Bill Bronchick > Question and Answer |
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Question by Frank:
I was looking to incorporate. However, I recently come across an article "the personal-holding-corporation trap." If 60% or more of corporate income is derived from investment, and less than 40% comes from actual operation of the business, then the corp is classified as a personal holding corp. (I assume this applies to "paper" being held for cash flow). Therefore a special, higher tax is assessed. For someone looking for a vehicle to keep personal assets safe from a lawsuit, this seems like salt in the wound. You pay to maintain a corp, but end up getting taxed more. 1. Is there any way to avoid the classification as a personal holding corp? 2. Is an LLC a better way to provide lawsuit protection, without the extra taxation? Answer By William Bronchick: The personal holding company tax was designed to prevent people from "income splitting" by using a "C" corporation to lower their effective income tax. As you may well know, a "C" corporation's tax rates are lower than personal tax rates for up to about $100,000 of income. "S" corporations does not have this problem. Nor do limited liability companies, which provide better asset protection than corporations. Disclaimer: The foregoing is not intended to be given as legal, financial or tax advice, but intended for instructional use only. If you require legal, financial or tax advice you should seek the assistance of a qualified professional.
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