Which LLC company for flipping?

Question

I'm brand new and am planning on forming a Fix and Flip LLC taxed as an S corp.  From my reading this seems to be the way to go for this part of my REI.

My question is:
If my company is Bradshaw Properties, LLC then when I buy a house to fix and flip do I buy it under the name of a different LLC that I form for that property specifically so that I can sell that LLC to someone for a short term flip?  Or do I buy it under the Bradshaw Properties, LLC name somehow?

I am going to be using money partners to get started, so I was thinking that I would need to form a LLC with a money partner once I find a house to buy.  Put the offer in on the house with that brand new formed LLC or are there other steps that I'm missing?

It seems like I need to find the property before I partner with my money partner...so I need to wait until I find the property to form that LLC so it will have to be simultaneous with the offer that I submit.

But for tax purposes all of this income is reported under Bradshaw Properties, LLC...but how??

I hope this makes sense - I'm afraid I'm even confusing myself.  LOL!

Let me know if I need to clarify...

J Scott · Answer

That's definitely one way to do it.  They could be partial owners of the entity, or you could buy with the entity and just have a JV agreement with the equity partner.  Whichever was easier for you.

I don't generally have equity partners.  When I get a loan, I get a loan directly from a private lender and they get first deed of trust (1st mortgage) on the property.  I buy everything through my business, so they loan to the business, but have no interest in the business, just the property they are lending against.

That said, I sometimes do partnerships with other investors where we each contribute time, effort and money, and we generally do this with one of us buying the property in their business entity and then having a JV agreement between their entity and mine.

Terry Portier · Answer

Oh LLC’s are easy to form alright, no argument there….I think what was meant by the word “complicated” is spelled out very clearly in MR, Reeds article: LLCs: http://www.johntreed.com/entity.html

Won’t take long upon reading this to see how convoluted LLC’s are to many areas of the law. I think where they make more sense is bigger companies that sell public stock meaning it is more difficult to pierce to corporate veil. Further, the OA and contract law that binds needs a competition attorney(s) in that area of the law.

Seems to me the first thing to do is to define the business requirements then decide it’s complexity and how much money to throw at it, a GP, LP, or LLP might make more sense.

J Scott · Answer

The first disadvantage listed was complexity to form.  In my state, at least, LLCs are not complex to form.  It's a simple one page filing with an Articles of Organization and a small fee.

Of course, depending on what you're using the LLC for, the Operating Agreement, bookkeeping, etc, could get expensive.  But that has absolutely nothing to do with the type of business entity, that has to do with the business requirements.

Terry Portier · Answer

Here check this example out and read what it says about the first disadvantage of an LLC most people do not understand but VERY true, and some of you all form multiple LLC’s in complexity, hate to see your attorney fees to get out of a law suit. Then look at the other types partnerships that may suit your needs better. I got this from my local REC office.

http://networkkansas.com/docs/resource-partner-directories/business-organization-and-tax-structure.pdf?sfvrsn=0

J Scott · Answer

Send me an email or a PM...

Bill Gulley · Answer

Some lenders may have an issue with a buyer purchasing from an LLC with limited seasoning. What you are suggesting does work.

My selling costs are limited really to half the settlement agent, pro-rated taxes, and title search at a discounted rate.....vs the costs of filing fees for a new LLC, sale transaction of the LLC and assignment fees....so what ever is cheaper and eaiser. You may have attorney fees as well, don't know, I usually don't for most everything I do.

J Scott · Answer

I completely agree with Bill that it's possible to do all this in a single LLC.  The question is whether it's worth it to create a complex operating agreement, having to deal with complicated books, and most importantly, having equity partners who are going to want to audit you because they feel everything is being comingled (even if it's not).

This might be a better idea in states where it's costly to set up and maintain an LLC, but for the $50/year/LLC I pay, I'd go with separate entities for each.

But, Bill also brought up a great point that you'll want to get your own attorney and let him help you figure out the best way.   I'm certainly no expert at this (and probably wouldn't try to do it myself).

Dwight Bradshaw · Answer

J  Scott do you happen to have a JV agreement that you could send me so I can see an example of how to write one up?

Dwight Bradshaw · Answer

J  Scott and Bill Gulley

Thanks for the time to respond back and forth a little.  I think that I understand.

I like the idea of having one LLC (Bradshaw Properties, LLC) and buying all of the homes in that entity.  Possibly with JV agreements I could get funding from a hard money lender and keep it within the one company all the time.  I'll look into that with my hard money lenders.

I know this isn't under the right category but it ties in and I brought it up earlier: As far as wholesaling properties...each property purchased under a different LLC and then selling the LLC to the end buyer (who receives the property as part of the LLC's assets) avoids having to double close.  Does that sound right and like a good plan to you guys?

Bill Gulley · Answer

I'd have to say that I can create an operating agreement that provides for multiple members in different classifications, like preferred and common stockholders, that can facilitate seperate capital accounts, voting rights, collateral assignments, events of withdrawl as well as admitting new members, buyout provisions in the event of certain occurances and authorizations to sell or buy a property.

The different capital account are simply consolidated in the books of one LLC. One operating account at the bank. One set of books for the accountant and tax guy. And allocating expenses to any property, account or assumed by any one member or all.

Maybe I'll eat a little crow and say if you'll have a different investor for each deal and sell the LLC, perhaps for you it would be eaiser to have an individual LLC, if you were forming it and then getting rid of it  and not having the maintenance side or accounting issues of several LLCs.

If there were no RE transfer taxes involved, I'd consider admitting an investor under one LLC and then assigning it to a subsidiary LLC after the deal closed, then spin off the subsidiary. That way you would always initially contract in one LLC and avoid any issues with forming unneeded LLCs if a deal doesn't fly. Insurance would be easier too as properties were acquired if you used an umbrella initially. Financing might be better in a larger LLC holding more assets than an empty shell newly formed.

I'd say get with your attorney and kick these issues around, it might be better and simpler to do them one offs, but I doubt I would.  Either way, under these circumstances, ......good luck!

Which LLC company for flipping?

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