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Understanding Ownership Structures for Your Fix and Flip Business

When setting up your fix and flip business, you need to make some decisions regarding legal structures and how you will take ownership of the properties you buy. Will you own them in your own name, in a corporation, in an LLC, etc.? The answer to this question will have tax, legal, and liability implications for you, and this post certainly cannot replace the advice of your legal and tax advisers; however, we will provide a brief overview of your options.

Owning as an Individual

This is the simplest form of ownership and requires the least amount of advance planning – you simply submit the contract in your name and sign the documents at closing. Additionally, your tax returns will be straightforward, as you will report all income directly on your personal return. A significant downside, though, is that you will not be shielded from any liability risks associated with the property, such as personal injury and other similar claims.

Owning in a Limited Liability Company

A limited liability company (LLC) is a relatively simple business entity that can be formed quickly and inexpensively in most states. The basic purpose of an LLC is to provide some level of protection to your personal assets from claims against the LLC. In an ideal situation, someone with a claim against the LLC can only attack the assets of the LLC (your investment property) and not your personal assets. There are caveats to this, though, and you must follow certain steps – importantly, be sure to keep accurate records of your company’s finances and maintain accounts that are separate and independent from your personal accounts. Commingling money with your personal accounts may provide a creditor with a legal avenue to pierce the protection of the LLC and pursue your personal assets.

Filing taxes for an LLC is relatively simple and depends somewhat on how many partners (or members) you have. If you are the sole owner of the LLC, you will typically report all income directly on Schedule C of your personal return. If your LLC has multiple members, you can choose from multiple forms of taxation. The simplest option is to be taxed as a partnership, meaning that the LLC will file a brief independent tax return, and each member’s share of the income will be reported on a K-1 issued to each member.

Owning in a Corporation

In many ways, corporations can be similar to limited liability companies, though there are some differences. Corporations come in two types: C-corporations and S-corporations. C-corporations are used by large companies, file their own tax returns, and have the distinct disadvantage of being subject to double-taxation (both the corporation and its owners pay taxes on its income), so, for this reason, you likely won’t be using a C-corporation for your investing business. S-corporations, on the other hand, allow income to be passed directly to your personal return, just like an LLC.

There are several minor differences between S-corporations and LLCs, such as the allowable number and types of owners and potential limits on the transferability of ownership, but most of these differences are not relevant to the typical fix and flip investor.

What Next?

Register Your Entity with the State

Find your state’s corporate registration website and locate the form for registering a new limited liability company. This form is usually no more than 2-3 pages long and requires only basic information. Submit this form along with the filing fee, and you will have a newly formed company!

There are numerous companies that will handle the filing and registration of your company on your behalf. However, in most states, it really is easy to do all of this yourself, and there is little reason to pay someone to do it for you.

Request an IRS Employer Identification Number, If Applicable

If you will have multiple partners, any employees, or will file your company’s taxes as anything other than a disregarded entity, you will likely be required to request an Employer Identification Number (EIN) from the IRS. Fortunately, this is free and can be done online in a matter of minutes. Upon completing your application, you will receive a letter showing your new EIN – save this for your records and future use. Your lender may also require a valid EIN for banking purposes.

Draft an Operating Agreement

This document defines who owns the company, who has authority to make management decisions, and any other provisions that may be agreed upon between the members. If your LLC will be a single-member LLC, this document is simple – you are the sole member and manager. If you have partners, you will want to closely review and discuss the various provisions.

Open a Bank Account

Separating your business and personal finances is an important step in preserving the liability protection afforded by the LLC. Before doing your first deal, open a new bank account in your LLC’s name and be sure to transfer money from this account when you buy your first fix and flip property.