Structuring a business from the outset?

3 Replies

Nothing should hold a potential investor back from the first deal if the numbers make sense, resources are available, and they have a team they trust in place--I get that, and I am moving. But for those that are a little ways down the road, is there any advice on how they wish they would have structured themselves a little better at the outset? 

For context: I am in RI and want to do a BRRRR investment in NC. I have the resources (private lending) and am connected to a fantastic team that offers world-class support to real estate investors at Five Pillars Realty in Fayetteville, NC led by @Shelby Osborne

My specific questions: 

1. Did you form an LLC? At the outset or later? Where was the LCC formed in relation to your property? State of the property? Does it matter?

2. Did you setup separate banking? Personal or in the name of your LLC? Any particular bank or account type?

3. Did you consult a CPA or RE attorney with your first deal? Were they local for you (in your state of residence or occupancy), or local to the property wherein you were investing? Does it matter? 

4. Did you use any sort of finance software (like quickbooks et al) to keep track of everything for taxes? 

This stuff seems likes in the weeds right now, but there have been a number of endeavors where if I had known enough to organize myself from the start, things would have been more efficiently later. I plan to do several of these very quickly once i get started, and think it makes sense to have a structure in place to make that work.

Appreciate any insights. 

@Peyton Holtz I'll toss my hat in the ring on this one

1. I formed my LLC after my first flip and now use it to hold my rental properties. It is formed in the state where I hold my properties (Virginia) although I've read about forming them in other tax advantageous states. I'm not that advanced.

2. Forming an LLC requires separate bank accounts. Mixing your business and personal accounts pierces the corporate veil and makes the protections provided by your LLC worthless. I have a business checking and savings account, as well as a business credit card.

3. I did not consult a CPA on my first deal but now have a CPA and RE attorney that I use. My attorney is local, my CPA is not. I haven't had any issues with not having a local CPA. So much is done online now that it's much quicker to upload my documents to dropbox and have them reviewed. 

4. I have had QB in the past and I just can't get it set up like I want it. I know this is an end user problem but it's frustrating to me. I use Excel and have set up a robust spreadsheet over time that is designed exactly how I want it and gives me the information that I need. 

4. 

Peyton, those are the exact same questions that I have. I've read that the LLC should be in the state that you're investing in. Then I've also read that if you create a holding company that it doesn't matter. So much to learn!

CPAs will consult with you on minimizing taxes. Attorneys will consult with you on minimizing risks. If you have high net worth you probably want to include an attorney with your planning. If you are getting into real estate to build what is currently non-existent net worth, just start with a CPA and add an attorney later. The CPA recommendation will be specific to your overall situation. In my case, my CPA has us flipping in an INC and holding in an LLC. Some of my LLCs have filed S Corp elections with the IRS for tax purposes.

You have to use some sort of accounting software.  If you don’t your tax prep fees will be outrageous because someone will have to do all your bookkeeping first.  If you just set it up right from the beginning it will only need some tweaking at year end.  

Never mix personal and business accounts.  Rather, you should have set up a DUE TO PERSONAL or DUE FROM PERSONAL account on your balance sheet to keep track of loans from business to personal, and vice versa. Any distribution will reduce the Due to Personal. Any cash infusions you have to make will do the reverse.