Entity setup before first deal for flips

[Paris Ambush]

So I've been doing research on asset protection for the fix and flip strategy and ended up talking with the folks at Anderson Advisors. The advisor drafted up a plan suitable to my strategy and advised me on how it would both help protect me from litigation and tax savings, but I'm wondering if I really need something like this before finding my first ever deal. When you started out, did you need to setup your entity structure? I'm thinking something like this may not be necessary until a certain threshold of income and volume has been reached, which would then justify the overhead and expense of entities. What are your thoughts on the matter? I'll be doing this business in California.

Thanks,

Paris

[Will Barnard]

So here is my OPINION and is NOT to be construed as legal or tax advice:

If you have any personal assets of any value that you do not want at risk, then starting off with an entity and operating it properly (as to not have the corporate veil pierced) is the way to begin. if you were informed to flip out of an S corp, then that is what I was advised when I first started out as well. I held properties in LLC's and flipped out of AS corps. The only tax savings is the savings on social security and medicare taxes while avoiding double taxation as in a C Corp. S corps and LLC's (which an LLC can also have S corp tax election) are "pass through" entities where the business does not pay taxes, the income is passed onto you and your personal return.

The liability protection comes from the entity holding title to the property so that any law suits would go against the entity and not you personally (except for cases of negligence by the owner of the entity where the corporate veil could be pierced - there are other means this can happen too).

If you are looking to do this as a business and not a hobby, I recommend the entity route and make sure you have more than adequate insurance as your first layer of protection. The entity is layer two.

As far as volume, if you are only going to flip 1-3 properties, then I guess you can certainly skip the entity and just add additional liability coverage for added protection. When making offers on properties, having an entity name also provides you the professional appearance to lenders, sellers, agents, etc.