Do we need an LLC for side work and flips?

Question

Thanks in advance for clicking into this. Appreciate your time. I'll try and be short but not leave too much out.

My friend and I work in construction and want to start making some extra cash. He already has some possible deals lined up finishing some basements. We also want to get into flipping. Since there are two of us, do we need an LLC or would it just be easier to put it all under one of us and split the profit?

David M. · Answer

@Fred Shatzoff Luckily, I haven't had to do that. Is that for hard money loans? I assume its because the lender wants some assurance to limit risk to what is effectively their investment too, right?

@Michael Ablan With the recent tax cut, the C Corp looks much better since the overall tax rate is even less, so you can keep more money in your C Corp to keep flipping.  At basically 21%, you can't beat that since your personal tax rates are much higher plus SE tax (if you aren't using a S Corp).  Meanwhile, you just pay yourself a salary to live on so that is no different than any other tax plan.  Also, now you have a W2 to show for your salary instead of a complicated tax return to show to a lender.  That's the quick version...  Otherwise, second requiring the operating agreement.

Christian Smith · Answer

@David David Wow! I would have never expected someone to take the time you did to type all that out. Really appreciate that. Gave me a dang good start on further things to look into. So basically if it's my business and I pay taxes and all, I can't just give him his cut after taxes? For the record @Fred Shatzoff @Michael Ablan, we are currently working on financing as well but I'm trying to figure that out on my own. There is a hard money lender in my area who I don't believe requires LLC's but I jumped on here to figure out if I needed an LLC before I tried that route. We have a couple of potential private money lenders but it kinda of sounds like as a partnership, we may need an LLC regardless of it it's required by the lender, correct?

Fred Shatzoff · Answer

@David David I am a lender just telling you our guidelines require LLC to give loan. There may be other lender's that do not. Guidelines change as well.

Fred Shatzoff · Answer

@Michael Ablan original question asked about LLC. I am a lender we require LLC. Let's not in to other issues.  I am not an  attorney nor will I render legal advise.  Everyone has to do what they feel is best for their situation.

David M. · Answer

@Fred Shatzoff to answer your question, yes I have my own own investments, some long term rentals and flips.  I haven’t used “every” route when I’ve leveraged, and the refs have changed over the years.  So, no, I don’t know everything about lending, nor done them all, nor kept up

Fred Shatzoff · Answer

@David David these loans are no doc.

Michael Ablan · Answer

@Fred Shatzoff -  I don't think anyone is arguing for or against that point.....I don't recall the original poster asking if an LLC is required to borrow money to do a flip.

Yes, if he wants to borrow money from a HML or bank then it needs to be in an LLC.

If they're borrowing from a private lender, then no it doesn't need to be in an LLC.

If they're assuming a mortgage and rehabbing it with their own funds, then no they don't need to do it in an LLC.

If they're getting owner financing and rehabbing with their own funds, then no they don't need to do it an LLC.

Also, just doing a deal in an LLC doesn't automatically protect you from liability or litigation.

Fred Shatzoff · Answer

@Michael Ablan @David David hard money lenders only lends to LLC.  Plus you want to protect yourself keep business seeprarte from personal.  Have you done any flips?  If so did you borrow money?

Michael Ablan · Answer

@David David -  Interesting!  I'm going to look into this immediately!  Thank you

Michael Ablan · Answer

@Christian Smith  - I'm not your accountant, nor your lawyer.

However, most people flip within an S-corp so that they can avoid paying the 15% self employment tax on ALL profits.  It'll allow you to reinvest at a slightly faster rate.  Regardless, you should definitely have a business plan and operating agreement drawn up that details you're exact responsibilities, how profit is split, whose putting in what money, and what happens to the business if things go south.

Also, consider making someone 51% owner.  But again,  I'm just a dummy, so consult with an actual professional

Do we need an LLC for side work and flips?

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