LLC now or later?

Question

Good evening,
I am new in this great adventure of flipping homes and I need some guidance.
I am looking to start with one home at the time using a â€œlimitedâ€ budget. I am thinking about buying an existing rehab for $20,000. Should have $9,000 of rehab cost and will ask for a selling price right around $65,000. That same home sold for $72,000 16 months ago. Somebody started some renovation but apparently run out of moneyâ€¦
I believe that I want to form a LLC taxed as an S corporation if I decide to keep on flipping! I also believe that a CPA will do a much better job than I at setting up my business.
The questions are would you set up a LLC corporation for your first home? If so, would you use a CPA? In addition, is his or her cost worth it? (I received a quote of $1,400 to set up the LLC with a local CPA).
In advance thank you for your advices.
Ronan
Ps: Love the site, so much great info and tips, Thank you all.

Will Barnard · Answer

Ronan,
I advise for you to use a CPA for tax planning and accounting purposes, as well as structure advice (so long as he/she is an experienced RE CPA) and use another service for the set-up of entities. Your CPA charge of $1400 is excessive for entity set-up.
You can file yourself or pay a firm to do it. There are many companies out there that focus on such services. My guy is capable of setting up an entity in any state for a reasonable fee.

Now, if you need an operating agreement because your entity will have partners, then you are talking about a whole new ball game. Now you need an operating agreement and this should ONLY be written and structured by your RE attorney. Trying to skimp on costs in this department is a recipe for disaster.

As for the best entity to complete flips, it is majority stated and agreed that an S-Corp (or an LLC taxed as an S-Corp) is the best entity for such business strategies.

Bill Walston · Answer

Why do you consider this to be a better idea Aaron?  Why use two corporations when just the one (S-Corp) would accomplish the job?  And most advisers that I have worked with recommend an LLC taxed as an S-Corp over either.

Aaron McGinnis · Answer

Better idea -

A C corp to handle the business of flipping houses. You own it via stock and run it as the CEO. You take a smallish W-2 as an officer.

An S corp that gets paid by the C-corp, which then flows through on a K1 to you. You take a small W-2 from this company as well... as an officer.

Maximum liability coverage. Minimum tax burden. As an added bonus, you get to laugh in the face of the IRS at the end of every year.

Jeff S. · Answer

$1400 sounds high, about what a high priced law firm would charge. Speaking of law firms, why an accountant and not a lawyer?

Ebere Okoye · Answer

Hi Ron,  I do not think you need to use a CPA to set up your LLC but sometimes it is adviseable to use a professional to make sure you are doing things right. I have clients who do the set up and I do the review and other clients who want me to offer that service.  $1,400. for someone starting out?  This seems steep unless it covers all of their services for one year.  I usually charge about $399 for the Articles of Organization, EIN letter, 121-page Real Estate operating agreement and 1 hour consult on Entity structuring. Also, it depends on your state and how complicated the filing process is but most states are pretty straight forward.

Whichever way you choose, the most important thing is that you do register. I advise my clients to get their feet wet and if you do have a possible contract, you can just put the contract in as Property LLC(TBF). TBF means "To Be Formed"  and for some states, it takes as little as 24 hours to get an LLC up and running. So if you know the expedited filing rules of your state, you can hold off on forming until you have a property under contract. I hope this helps.

Adam B. · Answer

I could be wrong (and hope that others will either agree with or correct me) but if you are planning on doing business through your LLC, like getting loans etc... banks are more likely to loan your LLC money if it's several years old with years of tax returns.  So, it seems that the sooner you form your LLC the better.

Also, I don't know if it's best for a CPA to set up an LLC for you.  In Texas you can just do it through the secretary of state for cheap.  I think LLC's are all the same... the real protection (outside your LLC) comes from some sort of umbrella insurance...  But, again others hopefully will chime in as I'm not certain

Bill Walston · Answer

A couple of issues I see with this: 1) If the "profits" stay in the company, they will be taxed at the corporate level, and then again if distributions are made to the owner; 2) losses that pass through to you can be used to off-set other income; if they stay in the company they cannot.

There are some "internal" schedules that need to be maintained in order to track the shareholders' basis, but this does not affect the reporting to external users of the reports.  If your corporation is profitable an S-Corp designation should not prevent your getting a credit card, surety bond, or line of credit.

Aaron McGinnis · Answer

As a flipping entity, you may not want all profit and loss to pass through to you. You may want it to stay in the company instead to allow for better autonomous evolution.

To put this in another way - an S corp has no retained earnings. This may make building a capital base challenging. Yes, you could continue to buy stock every year with the income passed to you on a K1 statement in order to increase the value of the corp... but that may look wonky to an outside entity if you ever want to, say, get a credit card, surety bond, or line of credit.

A C-corp allows you to bring in other people who may want to buy stock but not have the profit/loss pass through to them every year. (And may not want dividends every year either)

Ronan Simier · Answer

Thank you,
I think I will be setting up my LLC  company myself  and will have it checked by a cpa. Good solution to save a little money and learn something.
Again, thank you everyone for all the great information and  tips.

Michael R. · Answer

My LLC cost 1k in ny due to the fact you need to put a notice in 2 newspapers for a certain time period. I set mine up with biz filings. i only asked my cpa for any tips before setting it up.

LLC now or later?

Most Popular Reply