Benefits of having an LLC when flipping

8 Replies

Is it beneficial to have an LLC before flipping and rehabbing homes? What are are some drawbacks you've encountered by not having an LLC established?

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We created an LLC for flipping mainly for asset protection and saving a bit on self employment taxes. We aren't making enough revenue yet to justify electing to be taxed as an SCorp, so haven't realized the SE tax savings.

Another factor is how you will fund your deals. Most hard money lenders I have spoken to will only lend to a corporation (LLC, SCorp, etc). I imagine private lenders would prefer the same.

In my opinion it's worth the money to set up an LLC for peace of mind alone. You should definitely speak with an attorney and CPA about your plans, they can provide the best guidance.

I heard a stat on the podcast that said real estate is the most heavily litigated category in the US. If you have a long career with this it's not a matter of if you get sued but when.

What people are usually arguing against is using business formation as an excuse. Very few people actually argue against doing it at all (and if someone does my recommendation is to nod your head and back away, you will be the one footing the bill). Asset protection is just part of covering your downside.

But don't play at business like little kids play house. I'm thinking of a company name. I have a phone number. I have business cards. Oooh I need a nice suit! Look at all I'm getting done!

As some other folks have mentioned here, asset protection is huge. Should something go wrong and you get sued without having an LLC all of your assets, even personal ones are at risk. If you get sued while under an LLC it's the LLC getting sued. So, only the assets that belong to the LLC are at risk.

The other major benefit is tax deductions. As an individual your tax bracket is determined by how much money you made regardless of losses/expenses. As a business, your tax bracket is determined by your profits. So say, John the individual made $100k this year, but had $80k in expenses, his tax bracket is still that of someone who made $100k. Using that same example for a business, the business would be taxed at the $20k profit bracket. 

For a great read on taxation via a business versus individuals you should read Tax Free Wealth. It's one of my favorite books! 

As an individual and as an LLC, your tax bracket is determined by net income after expenses and depreciation, not gross income. If you use your own SS number as the tax ID, the net income from an LLC drops straight to your net personal income and is included as 1 page addition to your tax filing. There are some items that directly reduce gross income, Called "above the line" expenses" such as utilities, repairs, other direct business expenses, in contrast "below the line" expenses such as mortgage interest are reduced by the % equal to your marginal tax bracket in your personal residence, but are fully deducted on rental properties. Clear as mud to read about, it's easier to look at an example ,

The bottom line is if you use your own Social for an LLC, you are fencing in that asset for liability purposes but the income from it is taxed at your marginal rate. If the LLC has its own tax ID, which gets beyond my personal. Experience, the net income would be taxed independent from your personal income. Then the LLC has to file a separate return and K-1's for its partners. At that point I suppose you'd be using professional legal and tax prep. My experience so far us to advise using an accountant with particular knowledge of rental real estate as there are lots of details ,

Best, Artie

The best asset protection is a lot of insurance. Insurance is cheap and they pay your legal bills if you get sued which costs you more than the actual damages. I have seen attorneys run up a 70k legal bill on a 20k slip and fall.