Have investor pay into LLC or directly company directly?

Question

Hi everyone,

I basically have a friend paying for an investment property which we will flip and then share the profit.  My question is - do i have him pay into the LLC and then pay the title company from the LLC?  Or do I have them pay the title company directly from his bank account?

*side note i will be paying repairs

*also if you know will you please let me know if i am supposed to issue a 1099 at the end of it all

Best,

-John

Michael Plaks · Answer

@John De La Garza

First - don't do business with friends unless you no longer need his friendship. "Everything will be fine" is at the top of the list of famous last words. ;)

Since your friend is paying for the property, it really should be his deal. It simplifies everything, from logistics to taxes to legal to your friendship.

By his deal I mean it should be either purchased under his name or under his LLC if he has one and can close under the LLC (which is much more complicated then closing under his own name).

Your arrangement with him should be that of a contractor, and in the end he sells his property and pays you your half of the profit (if any) and issues a 1099 to you.

Since you plan to pay for repairs, this should be documented as a loan from you to him, payable at sale of the property. Otherwise, if the deal flops - you will be holding the empty bag.

If you decide to ignore my advice (based on 20 years and thousands of clients) and insist that this must be your joint deal - then you will have to take the traditional approach. Which traditionally backfires, I must add. The traditional approach is to form a 50/50 LLC, have him put his money in it for the property, have you put in your money for the repairs, and then have the LLC pay for everything. And then pray that it all works out in the end - chances of which are less than 5%.

The partnership LLC will issue forms K-1, not 1099s.

Asset protection is an attorney's zone, however flips should not have much exposure unless bought for cash, in my non-lawyer opinion.

S-corps are useless unless you make at least $50k after all expenses, and then their tax benefits are not automatic. It requires strict discipline in separating the money and setting up a formal W2 payroll system. I would hold on S-corp until your business proves itself.

Michael Plaks · Answer

Account Closed

I'm confused when you in one message ask me for a recommendation on him buying the property, and then immediately post another message that the property has already been closed, and by you. So - was it or was it not, and by whom?

Why joint deals fail? Because the two people always discuss dividing profits 50/50, but forget to discuss and agree on:

- splitting costs 50/50

- splitting work 50/50

- splitting risk 50/50

When something goes wrong, and something always does, the one with the most money in the game takes the hit. That's why he should be the owner, not one of the partners.

Seth Teel · Answer

Account Closed described, however we purchase the property in a Land Trust.  In our scenario we buy the property under "123 Main Street Land Trust," If we are splitting all costs 50/50 - Cash out of Pocket, Loan (if there is one), Renovation Costs, Soft Costs (insurance, architecture, permits), etc., my LLC is 50% beneficiary, my partner's LLC is 50% beneficiary.  I am always the Trustee for the trust.

If each entity is bringing different amounts of money to the project, we adjust the percentage the beneficiary holds in the land trust.  For example, If am bringing 75% of the cash needed for the project and my partner is bringing 25%, the percentage held in the trust reflects this.

In our partnership, my partner typically handles all of the accounting, and all payments/expenses (AKA: Check Writing).  I am usually the guy on the ground informing the design and ensuring our general contract (and subs) stay on course.

At the end of the project, I list the property and take a commission for doing so (I don't work for free).  Once the property is sold, closed, and funded, and all debts/reimbursements are paid, we split the profit based on the actual percentage cash outlay for the project.  In most cases this is 50/50.  My partner pays me my cut of the profit as a "consultant fee," and 1099s me at the end of the year.

This relationship has worked well for us and is pretty clean (tax-wise). It also gives each of certain protections (or at least the illusion of them).

Good luck with you project.  Just make sure the profit percentages and division of labor are well hashed out prior to starting the project.  Otherwise both partners will end up unhappy and may not work together again.  As the saying goes, "The only ship that won't sail is a partnership." #RimShot

Michael Plaks · Answer

Account Closed

SA has at least 3 different REI clubs. My favorite is Alamo REIA. I recommend you start networking with other investors, especially the seasoned ones, if not already.

Best luck in your business!

Ashish Acharya · Answer

Account Closed ,

Since you already have an LLC, why not utilize it for asset protection? If you wanted to personally pay for the transaction, there was no use of the LLC.

Also, flipping is a riskier activity compared to holding a rental. Thus, you might want to keep the entity separate. Meaning:  The entity needs to maintain its own books and other steps to get the desired asset protection. You need to treat LLC/Scorp as a separate entity. Don't pierce the corporate Veil:

• This can occur if the entity either is poorly capitalized.Inadequate Initial funding of the entity
• or fails to maintain a separate identity from its owners ( using the business bank account for business purchases, maintaining separate books)
• Conversion of entities Assets for Personal Benefit:
• Another factor that poses a risk of piercing the corporate veil is the draining of entities assets (such as payments of large salaries to shareholder-employees) that leaves the entity with inadequate resources to pay its debts.
• Do not commingle personal and LLC assets.
• Maintain a separate LLC bank account.
• Execute an operating agreement.
• Follow the provisions of an operating agreement.
• Have LLC member meetings according to the operating agreement.
• Title property in the name of the LLC.
• Maintain insurance on LLC property in the LLC's name.
• Sign all LLC documents in the LLC's name, not the members' names.

These steps will also provide a better defense against other creditors attempting to show you pierced the corporate veil.

So,  put the money in the LLC's Book as capital contributions from your partner, and use the moeny for the transaction.

Also, although I do not know the extent of the business you have conducted so far or will in future, you should consider electing S-corp.

S-corp saves you 15%  SE tax on your net income. Something to talk to your CPA.

Good Luck.

Account Closed · Answer

@Michael Plaks I said I closed because I signed for it (as deed is through my LLC) but he paid for it.  (or most of it I should say)  We have estimated to be all in 130k.  He paid 65k up front on the property but it didn't cover the entire cost (79k was total on CD) so I paid the rest.  I signed for it as the deed is under my LLC.

Our joint venture agreement outlines...

-splitting the profits - It is not 50/50 but instead in direct proportion the the amount of money put in to the deal by each party.  So if I put in 40% and he puts in 60% of the costs, I receive 40% profit and he gets 60% - or vice versa. (we are shooting for 50/50 but have an understanding and documented that it could change.

- splitting costs 50/50 - We put in the repairs estimate and add holding costs to come up with a total all in cost.  Then each party pays half of that number.  If there are additional unforeseen costs throughout the project - we can pay them 50/50.  If he wouldn't want to I would pay it, how ever the deal would no longer be 50/50.

- splitting work 50/50 - The work is not split at all.   I handle the fix and flip, he is really only a private money lender.

- splitting risk 50/50 - This is outlined in the JV agreement along with several other clauses, like what happens if one of the parties dies etc.

Thank you for explaining what typically goes wrong.  It seems that the JV agreement that my attorney put together addresses those, but that doesn't mean that deeding the property in my LLC was still the best way to go about it.  I like the process that @Seth Teel has and will be looking more into it.

Best,

-John

Account Closed · Answer

@Seth Teel thank you - that's an interesting set up.  I pretty much closed on this property on the afternoon I posted this so I guess a little too late.  But at least I have the LLC in place and can use that for the next flip - just need to weigh these other options to see which works best.  When I asked my lawyer how to set it up this is what he came up with.  But if one of these options is better I would like to shift over to it.

Best,

-John

Account Closed · Answer

@Michael Plaks Thank you for your feedback.  He doesn't have an LLC so what you would recommend is for him to purchase the property under his name and then get an attorney to draft a loan document from me to him as I am paying for the repairs?  And then I'm assuming a JV agreement to show we are to split the profits (if any) 50/50?  Also would you mind sharing why joint deals almost always fail?

Best,

-John

Seth Teel · Answer

@Manolo D.

The trust document I use was developed by a paralegal and I fill it out myself.  Trusts are generally not filed with the state or at the local courthouse (at least in Texas).  The document resides with the Trustee.  You can be both the Trustee and the Beneficiary for the Trust if you want.  Depending on what we plan to do with the trust we may file an "assumed name" under the trust name.  This is usually so we can accept money and deposit checks into a bank account without opening a specific account just for the trust.

Seth Teel · Answer

@Becca Cross

First let me say, I am not an attorney nor an accountant.  I know just enough to be dangerous (mostly to myself).  I think you are correct in your concern about adding to the current trust, but it may be a non-issue. I recommend contacting a real estate attorney, because adding it to the current trust would be the easiest solution.

Putting the property into it's own trust is very easy and not very costly at all (at least in Texas).  This is something a legal attorney can draw up. You may even be able to have a local title company use their attorney to draw up the Trust docs.

I can't speak to the level of protection offered by the trust relative to that of just an LLC.  However owning a property in a Trust does afford you a certain level of anonymity as the true owner (the beneficiary) is not public record.  Additionally owning in a trust with an LLC as the beneficiary create another layer that must be breached to "pierce the veil."

As far as your 2017 investment in the property, its all how you write it up and what your original intention was, as well as what the two parties (you and your mother) can agree on.  You should consult your accountant, but you don't need an LLC to have a business, and if you itemize may be able to take this as a deduction.  April 16th is rapidly approaching, I would find a business savvy accountant and see what can be done to take advantage of your 2017 expenses on this property.

Best of luck, and like the Cubs said for some may years, "there's always next year."

Have investor pay into LLC or directly company directly?

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