LLC now or after first flip?

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LLC now or after first flip?

Mo S.
Real Estate Investor · Houston, TX · Member since 2010 · 9 posts · 5 votes

I'm currently looking for my first flip and have received conflicting advice from some of the local investors I've spoken to. Some say it is better to get your feet wet and go through the first flip from start to finish before setting up an LLC while others say to set it up beforehand.

I will personally be investing $75K into the venture and my father is willing to invest an additional $100K in exchange for 30% of the profits.

I think we'd be better off getting the LLC taken care of before purchasing our first property in order to protect our personal assets, but others have said it isn't a big deal if we have insurance and use contracts to properly protect ourselves with contractors, etc.

I'd really like to hear the opinions of experienced BP members and I would appreciate any advice!

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Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
15y

Mo,

From my experience and info given to me over the years from many asset protection advisors, attorneys, CPA's, etc, you should not be flipping properties in your personal name! You open yourself up to personal liability if anything should go wrong (during rehab, someone gets hurt above and beyond your insurance coverage, and most importantly, after you have sold it, the buyer could come back at you and sue for something). Better for you to get your entity sued which holds very little to no assets, than your personal self!

Also, for tax purposes, I have been instructed in my case to flip using a S-Corp, and hold my long term rentals in LLC's.

This is not legal or accounting advice, just third hand info from my experiences.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    15y

    That is great advice from Chris. Since this is a flip, the DOS is a non-issue, but the advice given provides notice and when the bank agrees, they waive their right to the DOS.

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  • Dan Schwartz
    Real Estate Investor · Baltimore, MD · Member since 2011 · 34 posts · 5 votes
    15y
    Originally posted by James Vermillion:

    Dan, can you provide a little more insight as to why toy would wait?
    Sorry for the run on sentence, but that is exactly how I've done it...Good luck to you!

    Sure. Basically, once I got my first deal done and saw it was possible, I then decided to position it as a business, and had some capital from the first deal to create an entity, operating agreement, logo, website...etc.

    Do your first deal on your own basically to get the capital to take it to the next level..

    1Reply
  • Jonnie Emton
    Real Estate Investor · Spencer, OK · Member since 2011 · 5 posts · 0 votes
    15y

    I'm no real estate expert at this point, but isn't the first, second, and third rule of business to make money? It seems ludicrous to put "forming an LLC" in front of making a profit on a first deal. It reminds of several articles I've read about starting a business that list items like visit your accountant and lawyer, print your business cards, obtain a business license...but don't even having SELLING on the list!

    Also, I think I remember reading that Donald Trump at one point titled his properties in his own PERSONAL name.

    Is this seeming obsession with LLCs actually a worth while exercise (especially for a first deal), or is it propaganda from the legal profession that people just buy into? (Just trying to understand this a bit better)

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    15y
    Originally posted by Jonnie Emton:
    Is this seeming obsession with LLCs actually a worth while exercise (especially for a first deal), or is it propaganda from the legal profession that people just buy into? (Just trying to understand this a bit better)

    It really depends on your personal situation. If you had $5M in personal assets and knew that those assets were at risk if you got sued by a contractor who fell off a roof or a tenant who got carbon monoxide poisoning in your rental, you might decide to preemptively ensure that your liability was limited or eliminated.

    A business entity is one way to help do that.

    On the other hand, if you don't have a penny to your name, and you don't have any additional income you're trying to shelter from taxation, by all means do everything in your own personal name.

    There's no one right answer...

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  • James Vermillion
    Lexington, KY · Member since 2009 · 2k+ posts · 1k+ votes
    15y
    Originally posted by Jonnie Emton:
    I'm no real estate expert at this point, but isn't the first, second, and third rule of business to make money? It seems ludicrous to put "forming an LLC" in front of making a profit on a first deal. It reminds of several articles I've read about starting a business that list items like visit your accountant and lawyer, print your business cards, obtain a business license...but don't even having SELLING on the list!

    Also, I think I remember reading that Donald Trump at one point titled his properties in his own PERSONAL name.

    Is this seeming obsession with LLCs actually a worth while exercise (especially for a first deal), or is it propaganda from the legal profession that people just buy into? (Just trying to understand this a bit better)

    I don't think anyone is saying to put forming an LLC in front of making a profit. I knew I was going to start buying real estate, I did some research and decided an LLC would be best for me and my business partner. In my state it cost us less that $50 and we could do it online. It in no way slowed down our making a profit on real estate.

    There are ways to do everything and like J Scott said, it depends on your personal situation, but for many, it is the easiest, quickest, and cheapest way to get some protection. That said, I wouldn't advocate letting setting up an LLC come before making a profit.

    0Reply
  • James Endress
    Real Estate Broker · NY · Member since 2011 · 12 posts · 1 vote
    15y

    Set up the LLC so you are protecting yourself and your father

    0Reply
  • Kim Knaust
    Claremore, OK · Member since 2016 · 60 posts · 1 vote
    10y

    The real estate class I was in taught to do rentals as an LLC and flips in a C Corp (said you could build credit better with banks and would protect us as far as liability?). I'm seeing a lot of comments about LLC's and some about S Corp's for flipping.....confused now which is best?

    Also, they taught for flipping to set up a C-Corp (in a state like WY or NV w/ best tax advantages) and then an LLC in the state I'm starting to work in UNDER the C Corp in WY or NV. I talked to a local state attorney that didn't like the idea of going this far to set up entities like this. What do you all do?

    0Reply
  • Britini Bratcher
    Evansville, IN · Member since 2016 · 5 posts · 0 votes
    10y
    I've always know it to be best to set up an LLC before in order to protect your personal assets.
    0Reply
  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    9y

    I have recently hired a law firm for counsel and they told me to set up an LLC for the rentals and an S Corp for the flips.

    My question is, I purchased the house before the S Corp was set up and it is about ready to flip. The S Corp is now set up so do I transfer title to the S Corp before listing? The realtor seems to think that will screw up the sale since the title was recently transferred. I am waiting for an answer back from the lawyer but he is on vacation so thought I'd ask here since I need to do it asap.

    0Reply
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    9y
    Originally posted by @Ronda R.:

    I have recently hired a law firm for counsel and they told me to set up an LLC for the rentals and an S Corp for the flips.

    My question is, I purchased the house before the S Corp was set up and it is about ready to flip. The S Corp is now set up so do I transfer title to the S Corp before listing? The realtor seems to think that will screw up the sale since the title was recently transferred. I am waiting for an answer back from the lawyer but he is on vacation so thought I'd ask here since I need to do it asap.

     I highly recommend against transferring title at this point.  If your attorney recommends otherwise, make sure he is familiar with real estate financing requirements and underwriting guidelines...

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  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    9y

    Thanks for the reply @J Scott

    I am waiting to hear back from 2 lawyers actually. One at the firm that set up the S Corp for me and one at the Title company. I made a mistake last year on not doing a 1031 exchange and got killed on taxes (10 years of recaptured depreciation.) I am trying to be very careful on this one and play all my cards right.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Ronda R., All the discussion over the last 5 years aside on this thread, from a 1031 perspective only you should not transfer title from that property immediately before a sale if you want to do a 1031.  That creates all kinds of bad possibilities.  

    However, I'm not clear on whether this property you are talking about is one of your flips or something you bought to hold.  If it is a flip then it is not eligible for 1031 anyway so transfering title does not hurt you.  A properly set up S corp should result in savings of at least self-employment tax on your transaction.

    If it is a property you bought to hold then you need to leave title where it is and complete the 1031.  After the fact you can contribute the new replacement property into the entity best suited for it and not hurt your 1031.

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  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    9y

    the 1031 that I mentioned was a rental that we held for 10 years and just sold last year. This property will be a flip so no 1031. I do want to get it under the S Corp though so I won't have to pay the extra taxes. It is only in my name so not sure if it is necessary to put it in the S Corp name at this point. Could I just deposit the proceeds into the S Corp account? This is all new to me.

    0Reply
  • Elliott Schiller
    Hope Mills, NC · Member since 2016 · 5 posts · 1 vote
    9y
    Originally posted by @Ronda R.:

    the 1031 that I mentioned was a rental that we held for 10 years and just sold last year. This property will be a flip so no 1031. I do want to get it under the S Corp though so I won't have to pay the extra taxes. It is only in my name so not sure if it is necessary to put it in the S Corp name at this point. Could I just deposit the proceeds into the S Corp account? This is all new to me.

     Any word?  I'm in the same deal, own house in my name and getting ready to sell.

    0Reply
  • Ronda R.
    Investor · Atascadero, CA · Member since 2015 · 238 posts · 90 votes
    9y

    @Elliott Schiller I did not transfer it to the S Corp because it would have delayed the closing.  I sold it in my name. I will put future flips in the S Corp name though. I talked to my lawyer and he said it really doesn't make much difference until you start flipping 3 or more a year. I haven't done one this year so far but I am on the hunt. Wondering if I even need the S Corp at this point.

    0Reply
  • Kim Knaust
    Claremore, OK · Member since 2016 · 60 posts · 1 vote
    8y
    What is managing and charging order, Alonzo Abron ?
    0Reply
  • Patrick Martone
    Engineer · Monmouth Beach, NJ · Member since 2016 · 132 posts · 25 votes
    8y

    I have an LLC i used for a project which never took off. Could I use it to purchase my first flip? will I need to restructure anything? I set up the LLC online with SWYFT.

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