What do you guys think flipping houses without LLC or an entity? I have flipped 5 houses with my personal name, and a little worried about the liability. I would like to hear from you.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
14y
Here are a few not-to-terribly compelling arguments (except for one) to operate under an entity:
Asset Protection
As others have noted, depending upon the risks you take and the amount of insurance you have, it might not matter. Note that this won’t prevent you from being sued. It might limit the recovery of a judgment though.
Privacy
An entity puts slight impediments in front of you if you ever get sued and the plaintiff’s attorney does an asset search on you. This is not perfect and will generally only delay the inevitable.
More important, if you have to send out 1099's, an entity will enable you to use its FEIN instead of your social security number. Of course, you could operate as a sole proprietor (which is what you're effectively doing now) under a DBA and get an FEIN to use on a 1099 instead.
Tax considerations
Probably the best benefit is to be able to avoid payroll taxes on a percent of your income by paying dividends under an S-Corporation. I understand the S-Corp election in an LLC provides the same benefit. This is a real and valuable and worth considering on its own.
Borrowing
Many hard and private money lenders won’t loan to you as an individual if you need money for one of your flips. Entities only, to reinforce a business purpose.
State fees and tax returns are also an issue. In California at least, the minimum franchise tax for an entity is $800. Regardless of what it is in your state, you’ll also have to prepare separate state and federal tax returns which are generally costly if you use a preparer, which you should.
Forcing you to stay organized by maintaining careful tax records could also be a benefit if that’s an issue with you.
Don't a kid yourself? It only takes a good skip tracer to find out everything about you regards if you hide behind an LLC or whatever. A safe way is if you get sued say here is my insurance company's info. A few years ago, a lawyer came to me to locate what he called a slick Willie that had everything in an LLC and lo and behold slick Willie forgot to include three businesses, he was a part owner in and one house. He thought no one knew about until he was served at home. And today he is not a slick Willie.
Rental Property Investor · Fond Du Lac, WI · Member since 2015 · 261 posts · 78 votes
10y
Sorry for bumping an old post, but i'm currently asking myself the same question
I found an AWESOME partner and i'm in it for the long haul-- I think the fact we're asking if it's okay to do it outside of an LLC means we probably already know the answer, and that is that we know we SHOULD.
Thanks for all of the awesome post and information everyone