Form an LLC for flip in Philadelphia?

Question

Hey BP, I’m looking for advice on my first deal that we just got under contract. It is a flip, and basically I'm wondering if I should form an LLC for this deal.  I know of investors that will form an LLC for every house they flip.  I am part of a 3-way partnership and feel like it would be smart to do in order to keep everything organized, especially finances, and of course liability issues.  Anybody have advice on a fast, inexpensive way to form a simple LLC in PA for this?  Any help is much appreciated.

Chris K. · Answer

@John Dreher

It depends on the situation. Personally for my own companies and investments, I would generally prefer not to add any person to my LLC whose only purpose is to provide money. I would rather give such person a note and a mortgage to borrow money. But sometimes that's not possible in some situations. It get's complicated and situational.

For what it's worth, consider what happens in the VC world. They give out ownership interests like candy to investors. But even there, they negotiate out relatively complicated agreements to see what exactly the ownership interests consist of. That's why if you look at those deals, they have 100 different classes of stock/membership interests.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Ahad Ali · Answer

I suggest forming an LLC after evaluating how high the equity risk is for the property. Find a CPA in NYC (if that's where you're based), many are versed in PA regulations as well. Or you could find one directly in PA. Message me if you need recommendations.

John Dreher · Answer

Thank you all for the great information. I do appreciate it. @Chris K. Do you think it would be smarter to set up an LLC with just one member and have the other two as “investors”? And not really members of the LLC?

Chris K. · Answer

@John Dreher

My standard disclaimer on this topic: as an attorney and as someone runs various businesses, I always try to discourage new investors from entering into partnerships or multi-member LLCs. Trying to properly deal with all the issues require a lot of time, effort, and probably fees. Many people don't want to do that and so they just proceed without dealing with all the issues. That's fine if everything works out. But it can get very messy if it doesn't.

Since you have three persons involved in this partnership and you are flipping, I think you are basically forced to create one. Without an LLC, the law will probably treat you as a general partnership. In Pennsylvania, the basic rule is that the general partners share unlimited liability which each other. So if one of you messes up as a partner, the plaintiff could try to hold all the other partners liable. This is actually one of the main reasons why LLCs came to exist.

But really, I would try to see if you really need to do a three-way partnership. Doing it correctly is hard and it's not even a situation where a lawyer can just give you all the "right" answers. Lawyers cannot give you all the "right" answers because every partnership/LLC is different and has varying dynamics.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Caleb Jordan · Answer

I don't know about the LLC in PA, but when you form an LLC just keep in mind how this will impact financing down the line. Usually its a good thing.

Shmuel Waldman · Answer

I am not a expert in LLC's

From a liability perspective separate llc's can protect you