My relative who is a tax attorney in OKC is advising me to start and S-Corp to put my mineral deeds in. Most of my minerals are in OK but I do have others in 8 states. I live in PA. so he can’t do this for me. I have 4 kids and 14 Grands who will eventually inherit over 40 deeds of various mineral rights. Every month I get approx 20 checks between $2.00-$4500.00. He said an sCorp as one entity would be divided by 4 thus eliminating the need to re-issue 40 Deeds to 4 kids and them receiving tiny checks divided by 4. This SCorp would ONLY includes the mineral rights. I have noticed that some people on this forum have started LLCs for the same purpose. My question is: which is better? He insists that the SCorp is. Also would it be a huge job to file the new deeds for the Corp myself?
Thanks for any insight.
I am only going to speak to the transfer of the mineral interests into whatever entity you decide to create. I would recommend obtaining an attorney in each state you own mineral interest to make sure it is done properly. Each state requires different language and has different legal requirements. It would be a shame to create an entity and not get the mineral interest properly put in the entity. That could result in a lot more money spent fixing it upon your death than the attorneys fees for drafting a deed.
Annie: You might also want to ask if a Trust might be a better option. It might keep you from the hassle of registering the LLCs in various states if their statutes require mineral owners to do so. The S-Corp is a passthrough election under the tax code meaning that you would be taxed at your individual rate.
This post is not legal, tax or investment advice. Reading or responding to this post does not create an attorney/client relationship.
An S Corp is a HORRIBLE idea. S Coroo poop s are very restrictive, complex tax vehicles. Their primary tax benefit is to shelter SELF EMPLOYMENT income. Earned income. That is subject to FICA and MC. One seldom EVER wants to own appreciating assets in an S Corp. if you need to distribute assets in an S corp it creates a taxable event unless you liquidate completely and even then the computational factors involved to bifurcate inside gains and outside gains(losses) is complex and can have unexpected consequences.
S Corps are for OPERATING entities. Cash in. Cash out. Maybe some AR and Inventory. Nothing appreciable.
Mineral income is NOT earned. It is PORTFOLIO income. NOT passive. NOT active. PORTFOLIO.
LLC is all you need. And it’s simply for consolidation of ownership (deeds). The only tax advantage in placing minerals in an entity relates to ESTATE tax and that is a much more complex discussion as to how that’s done. But does not sound like there’s an estate issue based on your numbers.
Real propert (fee simple or mineral) in an SCorp??? From a Tax Attorney??
Man oh man.
Thank you for the responses. I have to admit I felt a little uncomfortable about an s corp but didn’t know why. We do have ou minerals in our Living Trust and I’m considering just leaving it that way. I’d just like to leave it to my kids with the least hassle for them. Also still thinking about an LLC but didn’t realize I’d have to register that in each state,
The person advising you did not properly explain this to you or you misunderstood.
An S-Corp is an IRS designation - it is not the same as an LLC - one is not better than the other because one is a legal entity registered within a state to conduct business and one is a way in which an LLC can file taxes.
In every state you go to the secretary of state website and open an LLC, or you could open a partnership, or corporation. Corporations can be for profit or non-profit; there are several different types of parternerships - most deal with professional designations, ie a partnership of lawyers, cpa’s, doctors, etc.
LLC stands for Limited Liability *Company (but it is a type of Corporation) and it was created to shield personal assets from business risk. It is much like a corporation but is simplier in its upkeep and taxing requirements.
There are several ways you can choose to file taxes as an LLC, one of them is as an S-Corp.
I disagree with the poster who opined this was the worst idea ever. Although I am not a CPA, my husband is and I’ve been filling as an S-corp for the past 15 years as a landman, and honestly it really depends on your specific situation and tax bracket, what type of ownership rights you have, etc. So you need a really good CPA who has dealth with mineral/WI ownership to really get down into this with you to craft your most beneficial tax strategy.
Your friend is probably thinking that if you elected to be an s-corp the following rules would benefit yourself and your heirs. This is not a comprehensive list of benefits.
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he is correct that getting all of the ownership into one entity is going to make things much easier for everyone - and it definitely will be beneficial tax wise and you should do this no matter what you decide for the LLC and taxes. You could use a Trust for this instead of a business set-up, again a good CPA can help you eveulate what would work best for your specific situation.
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Under an S-Corp you pay yourself a salary - it is supposed to be around what you would make but pretty much everyone pays way less - so; you pay yourself 10,000 a year and you pay the employment taxes on that and then the rest of the income is taken as a destribution that is taxed as ordinary income with a tax rate of anywhere from 0-20%. You can see why self employeed people prefer this as in almost all cases the ordinary gains rate is less than the self employment or employee tax rate.
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You will be able to deduct a lot of expenses including the cost of a year shareholders meeting.
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I am guessing he was thinking that after you pass the heirs would become the “employees” and you would use the same scenerio above.
I do agree with poster about the lawyer for the deeds. Please, consult an oil and gas title attorney in each state that you own interest to create your deeds. Not just a real estate attorney. You need an oil and gas attorney who does title - not litigation or anything else. Preferably someone who is writting title opinons for oil and gas companies. Especially if you own anything in the State of Louisiana. It is really insane how often attorneys that have no business creating deeds dealing with minerals do and how often then are messed up. Likewise with out of state attorneys filing deeds - each state has it’s own little quirks. I see people try to file survivorship deeds in Louisiana - guess what, those don’t work here. People try to file blanket deeds in Louisaina - you can do that in TX but not LA, etc.
While you are techinically correct it is really semantics. An LLC is a type of coropration.
It is important to consult a CPA or other tax advisor about all of the ramifications of entities holding minerals. In Texas, a limited partnership can avoid franchise tax on royalty income, but all corporations and LLC are subject to franchise tax. So you need to look at the franchise tax rates to see if you will be affected. A Sub-S has issues where it owns real estate assets because a distribution of the assets to a shareholder can trigger capital gains. This is not the situation with a limited partnership. Using a Sub-S for earned income such as commissions as a landman is different from using it to hold real estate rental or royalty assets. You need to consider the tax effects of choosing which state to set up a company or partnership - in the state where assets are located or the state where the owner resides. Some states such as California and New York, have extensive reaches on taxes. And possibly whether it would be better to have several entities if the assets are substantial and in multiple states. Only an advisor with knowledge of all the details of your minerals and estate plans can provide the best advice.
An s corp is the worst idea ever for a taxable entity to own mineral interests. If you’d read my post you’d see I slide to s corps making sense for operating entities with no capital assets. Like a land man.
So you’re proposing to convert portfolio income to earned income and incur the 15.3% SE Tax??? You’re right you’re not a cpa. I am. And I know very much what I’m talking about.
Without question.
Best regards.
Todd
See this post, it may make a trust or other planning more attractive than an LLC.
https://www.mineralrightsforum.com/t/new-corporate-transparency-act-may-impact-llc-attractiveness/69085?u=richard_winblad
This post is not legal, tax or investment advice. Reading or responding to this post does not create an attorney/client relationship.
I really appreciate all of the responses! At this point I am completely overwhelmed because 1.Our mineral rights are in 8 different states and I live in PA where I don’t own any minerals. 2.I can’t imagine how expensive and difficult it will be to find oil/gas attorneys and CPA’s in 8 states plus Pennsylvania. My CPA isn’t real mineral right savvy. They didn’t know about the depletion deduction until I mentioned it when I realized they hadn’t been using it. They were able to recover it 10 years back. We did see a PA. attorney (not oil/gas) and he suggested either transferring minerals to an LLC that we already have but is inactive or leaving an open trust for our 4 kids when we pass. I’m not sure how open trust would work. Our in-law, a very successful tax attorney in OK says anyone can get forms and transfer minerals but it sounds like the advice here is to contact attorney and/or CPAs in each state. Right now I have about 50 deeds across 8 states but mostly Oklahoma and Texas. Again, thank you so much for taking your time to reply.
You can visit the website for the state bar of each state where you have mineral interests and get a referral for a good oil and gas attorney in each state. You will only need a CPA knowledgeable about oil and gas in your state, not in each state where you have minerals.
I doubt that you would need a CPA for each state, but one knowledgeable about oil & gas tax would be smart to have. Your in-law in Oklahoma should be able to assist you with that.
You would probable only need limited attorney help in the states where the minerals are located. Usually preparing deeds and other paperwork for transferring minerals. The unauthorized practice of law generally prohibits an attorney to prepare deeds for filing in states where he/she is not licensed.
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It is an entity that provides liability protection and can be taxed in a number of ways, but it is not a corporation just as a mule is neither a horse or a donkey–it is a hybrid entity.
Poster needs to engage a very good cpa and tax attorney, but on facts posted IMHO, is extremely unlikely S corporation is the right entity. IRS is very aware of using an S corporation to game the social security system so beware if you go that route. There is a lot to be said to consolidating ownership of 40 interests in an entity that provides asset protection and eliminate the need on down the road to carve up the ownership into even smaller parts.
I’m not a CPA here, but my understanding is that FICA is based upon wages and not on dividends, royalties etc. There are pros and cons with every answer.
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