What is your preferred LLC Structure for Fix & Flips?

Hi @Damon M., congrats on getting started in real estate investing. When it comes to business and tax structuring for fix and flips there are several things to keep your eye on, especially as you expand you build out and expand your investment activities. 

First, I would second the comments of others that having an entity (e.g. an LLC) where the operating documents (bylaws for a corporation or an operating agreement for an LLC) clearly outline the partner's respective rights and obligations, allocation of profits and losses, taxation, dispute resolution procedures, exit strategy, etc. Hire a good attorney to assist with this process.

Second, think about your long-term goals and discuss these with your partner's as these can effect how you want to structure from the outset. For instance, if you plan on partnering on several flips with the same partners then there may be good reason start out using a holding/parent LLC to serve as the partnership entity for any/all LLCs setup for individual flips as this can reduce the number of tax returns your filing every year and thereby make your tax filings more efficient.

Similarly, there may be good reason to consider S or C-corp taxation (can be a true corporation or simply an LLC taxed as a corporation) for a couple of reasons. First, this may be more tax efficient than simple partnership taxation because income from flipping is considered active income and thus is hit with both ordinary income taxes and FICA/self-employment taxes. Corporate taxation such as S or C can help you minimize your tax liability depending on your goals.

Second, if you plan an investing into long-term hold real estate, such as rentals, then corporate taxation on your flips has the huge added bonus of preventing you personally from being tagged by the IRS as a real estate dealer. In a nutshell, when you are engaging in frequent flipping and/or wholesaling real estate activities, the IRS can tag you as a Real Estate Dealer which can cause you to lose out and numerous very powerful tax tools available to your long-term hold investment real estate such as 1031 exchanges, cost segregations, etc. Doing your flipping and wholesaling activities through a corporation (which is a separate taxable entity from you personally) will prevent you from personally being tagged as a dealer thereby preserving these tax tools for you.

Note: This information is for educational and informational purposes only and does not constitute legal, tax, or financial advice. No attorney-client, fiduciary, or professional relationship is established through this communication.