Two businesses so two LLCs?

Question

Business number one: I do some handyman work as a cash side business. I'm considering turning that into a proper business within an LLC allowing it to grow into something bigger and more self sustaining. Along with doing work for others, I'd like to be able to do some fix n flips within this LLC using company resources to buy, renovate and flip the property... does this make sense?

Business number two: for longer term buy u hold properties, we are setting up a second LLC for this purpose. It's insured differently, taxed differently, managed differently. So it makes sense to have a second LLC... does this make sense?

So, if we are on the right track with the above two separate businesses, my last question is... can our buy n hold LLC purchase the fix n flip properties from our renovation LLC? Or am I missing something along this thinking?

Thanks in advance

Jason Bott · Answer

@Joseph Niedermeyer it is difficult to insure a business that does work for others AND flips it's own properties. Most underwriters will not insure the flipping side of the business under a contractors policy. In order to keep your insurance costs under control I'd suggest the following set up, 1) LLC for the contracting done for others 2) Real Estate LLC for Buy & Hold and Flips 3) or a 3rd LLC for the Flips if it makes you uneasy mixing the Flips with your long term holds *LLC #2 would pay LLC #1 for any work performed.

Jon Reed · Answer

There is no real benefit for one of your LLC to purchase property from another LLC that you own. It just costs extra since you have to transfer title and funds around. I would purchase the properties with the buy and hold LLC and then run the renovation expense through your rehab LLC and charge back to the buy and hold LLC.However... you could also just have one real estate investing LLC and purchase/renovate everything through that one LLC. This would make account and taxes much easier.Then... if you want to do work for other people create a separate LLC which only handles work done for external customers. Ohh! And also, you should probably not just have a cash side business of doing handyman work. You should already make an LLC for this and run all the income and expense through it. If you have an LLC for this small handyman side work you could expense a ton of things (tools, mileage, materials, insurance, and more) and probably end up with a net loss at the end of each year and it will actually reduce your overall tax bill. Also, the LLC will give your personal assets a bit of protection verses just doing all the work directly in your own name. (not a tax/accounting/legal professional... just my opinion)

John Mocker · Answer

Joseph, To add to Jason's suggestion on the LLC breakdown, if any of the properties are in the 1-4 family range you also need to consider how the Insurance will react. If you want to insure a 1-4 family owned in an LLC, most carries will ask if the LLC has any other business. If so, normally they will pass on it. Also, for an Umbrella policy (additional Liability protection), if there are multiple LLCs they will also ask if the ownership is the same for each.

Jason Bott · Answer

When it comes to employees, your main protection will come from a Work Comp policy. The LLC may not provide any protection when it comes to Employee claims if you don't follow Work Comp law (each state is different).From a lending perspective (what I have heard from others) most lenders wont lend to the LLC until it is 2 years old so you will need to lend under your w-2/personal name to get started.Good luck with it.

Joseph Niedermeyer · Answer

@Jason Bott thank you for your help. That makes a lot of sense. I guess my mind goes to how each are structured, how each are financed and as you explained, how each are insured. I’ve seen stories where portfolio lenders prefer to lend on groups of properties valued at $500k-$1mil instead of $80k individual loans. And banks tend to not loan on flips, that’s more of a hard money/creative financing situation. Also, I don’t see my long term hold LLC having any employees at all whereas my flip LLC I might hire a project manager to help run the projects as I grow that business. And my rehab LLC could potentially have multiple employees depending on its size and scope. We are ready to move forward and make things legal so I’m just trying to cross my T’s and dot my I’s so we don’t get in trouble next year. Thanks again

Joseph Niedermeyer · Answer

@Jon ReedThank you for your input. Let’s assume I do 6 fix n flips a year. If I keep one and sell the others, would your advice be the same? And yes, it does need to be a legit business with an LLC. What started out as me helping a friend build a deck has slowly evolved into more and more stuff. I wasn’t planning to start a business but here we are. I’ve got a good full time W2 job but it’s nice having a side business. And I’m hoping real estate is our retirement one day.