Rolling Flipping Profits into a Consulting Firm

[Nghi Le]

I've been talking to a few lenders, financial advisors, and credit optimization companies. They all tell me that getting unsecured lines of credit is going to be hard for fix and flippers because it's a risky business. Banks don't like companies that have words dealing with Real Estate or Investment in their name.

I'm trying to build a long-term approach to getting business credit and unsecured lines of credit. I've been told that "Consulting" is seen as much less risky, and I wanted to structure my company accordingly. Right now I have an LLC taxed as an S-Corp which owns another LLC with two other partners that we primarily do our flipping in. I need to create a new LLC for flipping anyway due to partnership changes.

I plan to have an LLC (between myself, my wife, and my real estate partner) to flip houses. Let's call it Flipping LLC. My wife and I will also own another company called ABC Consulting (an LLC with S-Election), and my RE partner will have XYZ Consulting. Once we complete a flip in Flipping LLC, we'll roll our profits into our individual Consulting firms as a "Consulting Fee" to Flipping LLC.

For example, let's say we make $50k on a flip in Flipping LLC. Assuming we split profits evenly, we'll pay a $25k consulting fee to ABC Consulting and $25k to XYZ Consulting. Then each of our Consulting firms will show a $25k profit, and our Flipping LLC will have around $0 in profit.

This is good because our Consulting firms are S-Corps, which will alleviate our taxes (compared to regular LLCs). And this is the entity that we will apply for lines of credit (after 2 years of seasoning), so it's good to have our profits here. This allows us to be flexible in our profit sharing too, in case we don't always want to split 50/50. If we just let profits roll through our Flipping LLC, we'd have to state the profit sharing in the operating agreement / amendments, and make a new amendment / resolution every time we want to share profit differently.

I like this setup, and it doesn't seem to require any extra work. My wife and I planned to have an S-Corp anyway, and so did my RE partner, and we were going to have our S-Corps own a partnership LLC. So in the end, it's 3 entities, but at least this way they're totally separated (instead of having one own the other), which makes me feel like we're more protected.

Plus, my RE partner and I work as consultants for our day job anyway (software/data and business), so if we decided to venture out and do independent consulting, we’d already have our consulting firms created.

I wanted to reach out to the brains of BP, whether you’re an attorney, accountant/CPA, or experienced investor, to see what you think of this setup and if you can poke holes in it. I've also reached out to my own attorney and CPA, but it's nice to get different perspectives on it.

Thank you in advance!