Thoughts on multiple entities??

Question

Advice please.
I am planning to start my business wholesaling.. I have worked for a wholesaler so I am not 100% novice.. I do not want wholesaling to be primary for me, My passion is fix and flip.. I love the risk, i love the projects.. I just love flips.. for long term wealth after I build my flip portfolio, I plan to get a few buy and hold properties..

How do you go about business entities.. Would you have all separate entities for wholesale fix and flip and then buy and hold? or all under the same entity?

I am NOT tax savvy, I do not really know the advantages of the different entities or keeping them together or separate..

I do want to talk to an attorney and accountant about it eventually.. but just looking for other opinions now.

Thanks

David Dachtera · Answer

@Jackie F.,

That's EXACTLY how the law is written. Remember: these laws were written by rich people for their own interests.

When I renew my LLC registration every year, the on-line form allows for entities which are NOT owned by human persons.

Here's the thumb-nail sketch ("sketchy" - get it?) ...

You establish a revocable trust with your lawyer (for example) as the trustee and you as the beneficiary. You do not OWN it. Trusts aren't owned in the traditional sense. The trustee's identity is public knowledge. The identity of the beneficiary is protected. This is your first layer of asset protection.

You establish an S-Corp (or an LLC with the "S"-election). This will be the "operating" company through which the money flows. It is owned by the trust.

You establish an LLC as your first "holding" company. It is owned by the S-Corp and the trust (multi-member - better protection). Rentals are owned by LLCs. Money flows through to the S-Corp.

This is the basis of your business entity structure. You build from here.

Along with the insurance on each entity, this provides a high degree of asset protection. Your personal estate is well isolated from the entities.

Again, this is how rich legislators wrote the law - to protect themselves and their personal possessions / estate from the risks and liabilities incurred by the business entities.

A side benefit is that you are -NOT- self-employed! You make yourself an employee of the S-Corp (Pres / CEO or Manager, for example) and pay yourself using the salary / dividend split to limit your employment taxes (SUTA, FUTA, FICA, worker's comp.).

Nothing "sketchy" about it. It's how the law is INTENDED to be used.

There are other benefits, but #1: I'm not a financial or legal professional and #2: There's a whole 16 hour, 2-day class to explain the rest that I could hook you up with rather than try to put it all in one forum post.

Steve Vaughan · Answer

Same type of income equals same entity for me.  Since active operator income is derived from wholesaling and fix/flip, I'd be ok using the same entity - an LLC taxed as an s-corp most likely.

Buy and holds get passive income, so needs it's own entity if at all.  I don't put little houses with debt inside entities.  Too difficult to get financing.

Don't mix income types in the same entity @Jackie F.

David Dachtera · Answer

@Gautam Venkatesan,

Check with your tax accountant re: deductions, etc.

There's really no changes in obtaining financing. You're just doing it on behalf of the entities rather than in your own name. Again, consult your financial professional about how to handle that in your specific case. It will depend how your entities, etc. are setup. Entities will need some additional set up to establish credit for them as well.

I'm not a financial or legal professional. So, I won't try to explain what would be appropriate in any specific case. I just refer you to your own professionals.

Ned Carey · Answer

@Jackie F. there is a tax status called a "Dealer"   which is very negative if you are categorized that way by the IRS.  To avoid that, it is best to keep rental properties separate from flipping/wholesaling properties.

An "S" corp or LLC taxes as an S corp can save you some self employment income on flips and wholesales.It won't help on rentals.

AN LLC that is solely owned is a disregarded entity. For tax purposes it doesn't exist. However there is essentially no net affect on your taxes. If the LLC is owned by more than one person then it is taxes as a partnership. (Unless you elect to tax as a corp or S corp)

Jackie, not sure what you mean by

The obvious liability protection you are assuming is not near as strong as you might expect,

I am not an attorney. The above is my laypersons understanding of the law.

Kenneth Garrett · Answer

@Jackie F.

Short term projects are typically held in a S-Corp and long term projects are held in LLC.  Wholesale and Flips would be in an S-Corp. while buy n holds are LLC.

Check out Mark Kohler (Attorney and CPA) on YouTube he does a great job on explaining the differences.  He also has a weekly podcast called "Refresh Your Wealth".  Check it out.

Good Luck.

Gautam Venkatesan · Answer

Understood... thanks @David Dachtera

Gautam Venkatesan · Answer

Hi David - thank you for providing the basics. Can you help me understand how the "holding" LLC company or the "operating" S-Corp (or LLC with S-corp election) would obtain loans to purchase investment properties using leverage? Would it be thru' commercial loans, or private money? I'm guessing the individual would lose out on tax benefits of depreciation, interest/tax deductions etc?

Jackie F. · Answer

yup that definitley went over my head.. I am a green personality, but i will have to work with someone that knows much more about this then me .. hha

Jackie F. · Answer

See thats something I know NOTHING about.. I know I hear about it a lot not owing but controlling the business but it seems sketchy to me.

David Dachtera · Answer

@Jackie F.,

If you own the LLC personally (you shouldn't), then what Cody says is true. It can be treated  as a "disregarded entity".

If you own your business entities properly - i.e., they are owned by each other and are NOT owned by any human person - then that's rather a different scenario. Talk to a well versed tax attorney and tax accountant to learn the specifics.

Thoughts on multiple entities??

Most Popular Reply