Advice on Structure of Corporation?

[pstu24]

I'm getting ready to do my first flip on my own. I have flipped a couple with my father in law where I have come in to help, and I liked it so much that I flipped a house that my family and I currently reside in. So now I'm ready to go start to finish as the lead for a project I actually want to make a profit on!

Long story short: I am preparing to put a bid in on a property I've been watching for almost a year ... probably within the next few weeks and just on the other side of the new year. However, while my first inclination is to file for an LLC, I also don't know the optimal structure.

The biggest thing is I am looking for flexibility. I am going to go in on it with my father in law (who knows nothing of real estate / investing, but is a master builder and has built homes more or less from the ground up). However, while I am planning on doing this multiple times over and trying to flip between one and three a year - time permitting - I also don't know how many he will want to do. I also have two very close friends who I have done business with before who have already expressed interest in doing a flip at some point in the future.

BESIDES the fact that I have to be careful when it comes to business relationships with family / friends ... my biggest question is how to structure the organization. Should I just have multiple LLC's (one for my father in law and me ... one for my buddies and me, and one for just me) ... or should I just file as a company and bring them in as shareholders / investors and pay them their profits when sales are made. The good thing is they wouldn't be "members" of the LLC so they wouldn't be on the hook for flips they didn't want to be in. That being said, wouldn't it limit their ability to have involvement with the organization if they were only "investors" and not members? As in, if they wanted to come in and do work on the house itself, what's the issue with them as investors?

Just making sure to make the right structure up front so I'm not paying for it down the line with tax issues / lack of write-offs / people being involved when they don't want to be or people wanting to join after the company is formed.

Thanks in advance!

[CareCPA]

Since you will be working with different groups of people on different projects, I think I would do a contract for each property if it were me.
For example:
Property A: father and I will work on this property. We will split profits 70/30 since he is doing the work.
Property B: Friend A will invest $X, Friend B will invest $Y, profits to be split %50/30/20
etc, etc.

If someone just wants to invest in your general business, write it up as a promissory:
Friend A agrees to lend your company $X at Y% interest for Z years/months.

This means you could structure your entity however you want, and not have to worry about which people want to be included or excluded from each deal.

[SeattleCPA]

...However, while my first inclination is to file for an LLC, I also don't know the optimal structure.

An LLC can be taxed as anything... And if you don't make an election, default rules kick in that treat a single member LLC as a disregarded entity and that treat a multiple member LLC as a partnership. So I think your decision is really whether you want to make an election to treat the LLC as something other than the default classification.

Er, usually for real estate you don't want to do an election... Or, restated, usually you don't want real estate inside an entity treated as a corporation.

[pstu24]

Correct me if I am wrong... But as an LLC don't you only have members? As in if I file the LLC I would have one member as me and then one as FIL. But then that's the permanent structure of that LLC. And taxes for LLCs pass through to the members... which means if I do one project on my own, technically the profits would pass through to members. Which also means I can't keep assets or cash in the company because it all passes through. Furthermore, if the new president does in fact lower corporate taxes then why would i want to pass through my real estate earnings to my personal income tax when the corporate rate could be almost half as much? Please let me know if I am mistaken

[SeattleCPA]

Correct me if I am wrong... But as an LLC don't you only have members? As in if I file the LLC I would have one member as me and then one as FIL. But then that's the permanent structure of that LLC. And taxes for LLCs pass through to the members... which means if I do one project on my own, technically the profits would pass through to members. Which also means I can't keep assets or cash in the company because it all passes through. Furthermore, if the new president does in fact lower corporate taxes then why would i want to pass through my real estate earnings to my personal income tax when the corporate rate could be almost half as much? Please let me know if I am mistaken

I don't understand your question or questions, sorry. But if you are only owner of a LLC, LLC is single member LLC and is disregarded for tax purposes unless you elect to have your LLC treated as an S corp or C corp.

Who knows what Trump means with the 15% tax rate, but in general you don't want real estate inside a corp. (Some accountants say there's an eleventh commandment, "Thou Shalt Not Put Real Estate Inside a Corporation.")

I don't want to make a political comment, so please consider this a technical tax accounting comment: Some of the tax talk from Trump just doesn't add up (yet?)... I would not yet therefore use any campaign statements as inputs to your tax planning.

[pstu24]

Completely understand on the political stuff. But my question is basically to try and figure out if I even want an LLC or if I should structure in another way. From what I have been told, all profits are passed through to the members (owners) in the LLC. Is that correct? Because then who becomes the "owner" of the LLC? I would assume just me. However, if all profits are passed through and therefore taxed on my personal return, what happens on the projects where my FIL or one of my buddies wants to go in with me? Do I just pay them out a dividend and then they are responsible for filing their own taxes as investment / real estate earnings? Because making them members would not only open up the whole can of worms for quarterly estimate filing, but it would also mean they are members of the LLC, even for projects that they wouldn't necessarily go in on. Which is why I'm back to the original question of how to file.

Then the only other thing about it is how do I classify my friends/FIL? With an LLC you do not need to cover members for Workers Compensation. However, if I simply let them act as employees and they are on the jobsite when we renovate a house for profit, then by law they would need to be covered by worker's comp. So I know I have to have them either covered or have them in an ownership position, and I am just not sure which one is worse / easier?

Finally, can I ask why I shouldn't have real estate inside of a corporation? One of the gentlemen who has given me decent advice to get started has done just that I believe. He built his own development company and currently has (I believe) close to 400 properties of a certain niche in about 20 or so states along the east coast. I could be mistaken on your wording, but is there a reason not to include real estate inside the company, and if not, what would the alternative be?

Thanks! Always fun learning!

[CareCPA]

From what I have been told, all profits are passed through to the members (owners) in the LLC. Is that correct? Because then who becomes the "owner" of the LLC? I would assume just me.

Yes, and it depends on who owns your LLC. If you are a single member LLC, then it is just you. If your FIL owns part of the LLC, he becomes a member.

However, if all profits are passed through and therefore taxed on my personal return, what happens on the projects where my FIL or one of my buddies wants to go in with me? Do I just pay them out a dividend and then they are responsible for filing their own taxes as investment / real estate earnings? Because making them members would not only open up the whole can of worms for quarterly estimate filing, but it would also mean they are members of the LLC, even for projects that they wouldn't necessarily go in on. Which is why I'm back to the original question of how to file.

This is where I was saying do a contract for each project.
Assume you are a single-member LLC.If you do a project with your FIL and split profits 50/50, say you have $40k total profit on a flip. Pay your FIL $20k, take it as a deduction in your LLC, and you are down to your $20k in profit - the amount you will pay taxes on.

Then the only other thing about it is how do I classify my friends/FIL? With an LLC you do not need to cover members for Workers Compensation. However, if I simply let them act as employees and they are on the jobsite when we renovate a house for profit, then by law they would need to be covered by worker's comp. So I know I have to have them either covered or have them in an ownership position, and I am just not sure which one is worse / easier?

I do not claim to be an employment law expert, but structure it so you can treat them as contractors. No unemployment comp if they are not employees.

Finally, can I ask why I shouldn't have real estate inside of a corporation? One of the gentlemen who has given me decent advice to get started has done just that I believe. He built his own development company and currently has (I believe) close to 400 properties of a certain niche in about 20 or so states along the east coast. I could be mistaken on your wording, but is there a reason not to include real estate inside the company, and if not, what would the alternative be?

If all you are doing is flipping, an S Corp (or even a C Corp depending on your profit levels) would be fine. If you have any intention of holding real estate, or may even accidentally end up holding real estate, then I would not elect to be treated as a Corp. It just makes things more complicated, and become very detrimental if you try to distribute property out to any shareholders.

[SeattleCPA]

From what I have been told, all profits are passed through to the members (owners) in the LLC. Is that correct? Because then who becomes the "owner" of the LLC? I would assume just me.

Yes, and it depends on who owns your LLC. If you are a single member LLC, then it is just you. If your FIL owns part of the LLC, he becomes a member.

However, if all profits are passed through and therefore taxed on my personal return, what happens on the projects where my FIL or one of my buddies wants to go in with me? Do I just pay them out a dividend and then they are responsible for filing their own taxes as investment / real estate earnings? Because making them members would not only open up the whole can of worms for quarterly estimate filing, but it would also mean they are members of the LLC, even for projects that they wouldn't necessarily go in on. Which is why I'm back to the original question of how to file.

This is where I was saying do a contract for each project.
Assume you are a single-member LLC.If you do a project with your FIL and split profits 50/50, say you have $40k total profit on a flip. Pay your FIL $20k, take it as a deduction in your LLC, and you are down to your $20k in profit - the amount you will pay taxes on.

Then the only other thing about it is how do I classify my friends/FIL? With an LLC you do not need to cover members for Workers Compensation. However, if I simply let them act as employees and they are on the jobsite when we renovate a house for profit, then by law they would need to be covered by worker's comp. So I know I have to have them either covered or have them in an ownership position, and I am just not sure which one is worse / easier?

I do not claim to be an employment law expert, but structure it so you can treat them as contractors. No unemployment comp if they are not employees.

Finally, can I ask why I shouldn't have real estate inside of a corporation? One of the gentlemen who has given me decent advice to get started has done just that I believe. He built his own development company and currently has (I believe) close to 400 properties of a certain niche in about 20 or so states along the east coast. I could be mistaken on your wording, but is there a reason not to include real estate inside the company, and if not, what would the alternative be?

If all you are doing is flipping, an S Corp (or even a C Corp depending on your profit levels) would be fine. If you have any intention of holding real estate, or may even accidentally end up holding real estate, then I would not elect to be treated as a Corp. It just makes things more complicated, and become very detrimental if you try to distribute property out to any shareholders.

Regarding real estate inside a corp, agree with FrugalGrad...

BTW, probably the person referenced who has all the property has properties stored inside LLCs not corporations... and those LLCs are treated for tax purposes as disregarded entities or as partnerships. And that works great. You can put realty into and take realty out of disregarded entity or partnership with no tax effect.

With a corp, however, while you can put realty into corp you own without consequence (probably) you taking realty out of a corp is treated as exchange and triggers tax on any gain.

Also, property inside a corp is not going to get stepped up in basis at date of death of LLC member. But basis is stepped up for a disregarded entity or a partner probably.

[SeattleCPA]

BTW I also agree with FrugalGrad's other answers/comments/explanations.

[pstu24]

Perfect! Thanks so much for the advice - both of you. I agree with the points and like I said, was just looking for the best way to be able to structure it so that everyone was covered, but so that if individuals didn't want to be in it for the long haul they wouldn't be "stuck."

Appreciate it!

[NoNonsenseLandlord]

You are holding a short term property.  Get one LLC for a main company.  Have a contract or a written agreement with any  one who is going in on it with you.  They might want their own LLC too. The two parties would then be two LLCs.

Do not waste money creating an LLC for a short term flip.