Flip Houses: LLC and operating agreement?

Question

Hello,

I am planning to start with the first flip in Southern California. I know the market is not the best for this kind of operation at the moment but if I will find the right deal we are ready to pull the trigger.

I have a pool of investor ready to invest so I have a couple of questions:

1. LLC the best type of company?

2. any referral for the operating agreement (I read some people using legalzoom.com)? or are there templates that are good to start with?

Any advice is more than welcome!

Greg Dickerson · Answer

Your attorney and account are best to advise on legal structure and to draft the operating agreement for your management entity. You will most likely want to create an LLC to hold title to the property so one will not affect the others. This will be separate from your operating company. Again discuss this with your attorney and accountant. The best way to handle investors is to create a private lender program vs a partnership or JV. They simply become the bank. You offer a preferred return secured by a note and deed of trust.

Owen Dashner · Answer

I would suggest having an attorney advise on structure and draft your business docs, especially if you are going to be using other partners and/or private money. And have a CPA weigh in on the tax portion. You don't want to trip over dollars picking up pennies.

A lot of flippers use LLC's taxed as an S Corp (myself included), but please do not take that as legal advice because I am not an attorney. There are simply too many different possible scenarios based on your legal, tax and business structure needs.

Good luck!

Basit Siddiqi · Answer

@Luca GianiIt is recommended to speak with an attorney to draft up the partnership agreement. If you have investors who want to pull money into your fund, the fee that you charge should cover the cost of admin stuff like this.Regarding a partnership entity - from a tax perspective, a partnership return is required to be filed by March 15 of the following year(extension can give you more time to file). Normally investors prefer early filing of tax returns so they can receive the K-1 which would be required to file their tax return.Good luck!

Matt Maupin · Answer

@Luca Giani

When you say you have a pool of investors, it sounds like you are considering a syndication. FYI: the legal fees for that sort of structure range from 15K-30K+. Most flips are not going to support that sort of fee structure and leave enough left to make the deal worth while.

If you don’t follow SEC when raising funds you can end up in jail if one of your investors is unhappy and they report you.

Also, I wouldn’t recommend legalzoom.com for operating agreements or partnerships and I’m pretty sure they don’t have PPM templates for syndication.

We use AndersonAdvisors.com for our entity setups, but they will not set up syndication. If you are thinking syndication, I would recommend SyndicationAttorneys.com

Best of luck!!

Jim K. · Answer

@Owen Dashner's advice is spot on. LLC taxed as an S-corp is typically the bet for LLC's that are netting >$100k/year. It would be worth some time to research the tax and legal implications before consulting with your CPA & attorney.

Eric Johnson · Answer

Creating a single-asset LLC is most likely your best structure. An attorney can advise you on operating agreement language that should be present when dealing with investors in your deal.

Billy Jemial Miller · Answer

@Greg Dickerson so many golden nuggets in your reply.

Flip Houses: LLC and operating agreement?

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