Benefits of LLC vs no entity with flipping

[Marc Izquierdo]

In about a year I plan on starting to flip houses with a partner.  Recently, I've started to do some research on different entities (S-Corps, LLCs, etc) in order to potentially minimize taxation on our profits.

Based on my research (from a tax standpoint), I don't understand what the benefit of an LLC is (S-Corp elected or not) versus using no entity at all.

From what I understand about LLC taxation, I would make profit, that would be passed through to myself and my partner (50/50). We would then each pay self employment tax plus income tax on that money regardless of whether we take it out of the business or not (we intend not to).

Why would I choose that route versus using no entity and just paying capital gains tax?

The intent of the house flipping is to snowball profit over 3-5 years (while continuing to work W2 jobs) until we can purchase an apartment building. At that point, I can understand the LLC (for the liability issue). Until then, no entity makes sense to me.

What are your thoughts on this?

Thanks in advance!   

[Linda Weygant]

Flipping income is NOT capital gains income.  I don't know who is teaching this, but I wish they would stop.

Flipping is self employment income.  The IRS doesn't care if you're buying a house, improving it and then selling it or buying bread and lunch meat and selling sandwiches.  Same business model.

As such, there are techniques that MIGHT work for you to reduce Self Employment tax as an S-Corp.  However, there is no cookie cutter approach to this and what works for you may not work for your partner or anybody else.

Talk to a CPA that understands these issues and be prepared to discuss both you and your partners other sources of income, your retirement contribution goals, your future retirement goals, your tolerance for extra paperwork, etc, before you make a choice on what type of structure you will use to run your flipping business in.