Looking for advice from CPA on whether to LLC or not

12 Replies

I'm hoping there are some CPAs or personal experience (knowing I need to confer with a CPA) here to assist me with a decision on whether or not to open a LLC in TX (our place of residence and where we'll do all our business).

My husband and I just put in an offer with another married couple for a flip in TX. The other couple already has a LLC. Our plan was to create a Joint Venture between the two LLCs for this one project.

Since TX is a community property state, we can open our LLC and be treated as SMLLC for tax purposes so we would be treated as a single member LLC vs a partnership.

I guess my question is, is there any downside to creating an LLC other than how we report our taxes and reports to the TX Franchise Tax Board? Is there an advantage to listing as a partnership vs a SMLLC?

There is no tax difference between a single member LLC or none. It's strictly legal.

A partnership I wouldn't recommend unless you're going to continue working with this other couple. It now involves basis tracking, another cost of  return filing. 

If yourself and husband form a partnership vs. QJV then there's also no tax benefit, more tracking and complication. Only upside is audit risks on partnerships are much lower- because there's so much more info you give the IRS up front. 

@Dorys Prentice

There is no downside in creating an LLC for the two of you. As @Natalie Kolodij explained, it will not change anything for you on the tax side. Your tax return will look exactly the same, with or without your LLC. The only benefit is possibly an extra legal protection.

Between the two couples, however, your JV will almost certainly need to file a partnership return.

On a side note, partnering on your first flip with another couple is not something I would recommend, unless you have a real good reason to do so. If the reason is lack of money, then the money couple should probably be a lender rather than a partner. Discuss your business plan with an experienced accountant before setting yourself up for a potential disaster. FYI: over 90% of first-time flippers lose money.

@Natalie Kolodij and @Michael Plaks Thank you for the replies.  Maybe I worded my question incorrectly. 

Part a is a tax filing question. My husband I and plan to create a LLC for ourselves. My question about "partnership" was with regards on how to file our tax returns as either a SMLLC vs a partnership LLC.

Part b is the actual flip of this one house.  We plan to have a notarized joint venture agreement between our LLCs and our friend's LLC. We are not creating a legal entity called a Joint Venture Partnership (if there is such a thing).  @Michael Plaks will just a paper agreement trigger the need for a separate tax return?

I highly recommend creating a structure to protect yourself and think you are smart to not use your own name.  @Michael Plaks is correct in that 1st time flips are not usually huge moneymakers - so going into it, you want to make sure you're not particularly at risk.  In the case this partnership with the other couple turns sour, the hope for the best but plan for the worst can't be understated.   Also, depending on your structure you set up, you might be able to roll that into your estate planning & retirement account methods to help you increase your ability to create wealth and bundle it which your CPA can assist once you get your foundation in place.  I think thinking of the tax before the structure is a bit of putting the cart before the horse sort of deal.   I'm not personally a CPA but I think there are more considerations to think about in terms of exposure and taxing that need to be considered, especially since you've got another couple in the situation. 

@Dorys Prentice

We did answer your part a: your LLC will not file a separate tax return in 99% of situations. Very rarely does it make sense to file a partnership return between husband and wife, especially in a community property state.

Part b: you will probably need a partnership return for the JV. JV is a partnership, just a temporary one. There are some rare exceptions to this general rule, which is something to discuss with your accountant.

So I found this article which basically says that a joint venture does not file a separate tax return.   https://smallbusiness.chron.co.... Not sure how valid this is but it is something for me to verify with a local CPA.

Is a Joint Venture Agreement Required for Tax Purposes?
by Jack Gerard

When two or more professionals or small businesses work together on a single project, they may declare the project a joint venture. Joint ventures are formalized by the signing of a joint venture agreement, a contract specifying the rights and responsibilities of each party. Since many joint ventures are created for manufacturing or other for-profit purposes, some may wonder whether a joint venture agreement is required for tax purposes.

Joint Ventures
Legally, joint ventures are similar to general partnerships and are treated as such by some states. One of the primary differences between a joint venture and a partnership is the fact that joint ventures are created with limitations: a joint venture only exists until the purpose it was created for is accomplished or until the time period specified in the joint venture agreement has passed. Like general partnerships, joint ventures are created and maintained at the state level.

Joint Venture Agreements
The joint venture agreement defines every aspect of the joint venture including the specific role of each member, what each member is expected to provide as a part of the joint venture and the circumstances under which the venture will cease to exist. Financial distribution is also typically included in a joint venture agreement, with any profits or losses suffered by the venture distributed among the members according to the method described within the venture agreement.

Flow-Through Funds

A joint venture does not earn a profit itself; any money earned by a joint venture flows through the venture to its members. The profits are distributed according to the method described in the joint venture agreement, with no portion being held back for the venture itself. Any funds that are not directly distributed to one of the members must still be claimed by a member even if the funds are being paid to a third party or deposited into a trust fund or other financial service. Any losses suffered by the venture are distributed in the same manner.

Joint Ventures and Taxes
Because any profits made from a joint venture flow through to the individual members of the venture, the portion of the profit that each member receives is claimed on that member's individual or corporate tax returns. The venture itself does not make a tax filing on any of the funds that flow through it. Like general partnerships, the IRS does not consider joint ventures as a business structure and does not require a copy of the joint venture agreement or other proof of the venture's existence.

@Dorys Prentice

Don't read garbage from the Houston Chronicle written by unemployed liberal arts graduates who think they are experts in everything after reading couple blog posts. 

The credentials of this one: "Born in West Virginia, Jack Gerard now lives in Kentucky. A writer and editor with more than 10 years of experience, he has written both articles and poetry for publication in magazines and online. A former nationally ranked sport fencer, Gerard also spent several years as a fencing coach and trainer."

@Dorys Prentice Depending upon how it is structured, a joint venture could be considered a partnership that requires a tax return for Federal tax purposes.  Some people call an arrangement a joint venture, but the arrangement is really more like a prime-subprime contractor arrangement where one party (the prime) recognizes all the revenue and any funds split with the other party (the subprime) is treated like a deductible vendor payment.  In this situation, both parties file separate returns and the prime issues a 1099 to the subprime for the payment that the subprime received.

So just to update this thread, the initial sale of this house fell through and it looks like my husband and I are purchasing the house by ourselves.  No partnership with friends.  Much better in the long run.  Plan is to renovate and rent.  Maybe sell in a year or so.