So What is everyone’s bottom line opinion
For someone serious about fliping houses, investing in Foreclosure’s and/or rentals is it better, from the standpoint of Credit access, Tax savings and credibilty and anonimity, To form LLC’s for investing or isn’t it? I know each situation is relative ,But just in general for the majority of investors which would be more beneficial. Any accountants out there???
What I mean is–
Is it better to form an LLC, Build business credit, access that to acquire some properties without your personal Name being on them, then take advantage of any tax benefits that go along with simply selling inventory
OR
Is it better to use personal credit and funds to buy properties, fix them then Flip them and pay the capital gains taxes or Rent them and have the passive income to pay off the bills???
Thanks for your opinions and input
Vaughn In PA.
you are confused. the choice is not between having an entity paying more in taxes.
Re taxes: flips are not capital gains.
rentals generate capital gains when sold.
flips are ordinary income subject to income and self employment tax. total tax bite ~45%
whether you have an entity or not does not significantly impact the taxes. (without getting into C-corp “double” taxation - that’s more than I want to type today). Contrary to the commercials, you don’t “magically” achieve tax savings by having an entity.
however, taxes are not a yes/no decision. I personally enjoy the pleasure of buying a junker and fixing it up, even though the taxes are higher. whatever you choose, just understand the taxes and figure that in to your total decision making process.
re entities: for anyone who is seriously getting into real estate with the intent to acquire properties and build wealth, I always recommend purchasing inside an entity if possible. It’s just easier to do things right from the start than to attempt to “fix” your setup later. There is a cost in doing that, which is why it’s only for serious investors, and there are certain pitfalls to avoid, as BLL keeps us aware of.
If you’re not sure or just “thinking” about getting a rent house, you are not a serious investor.
the hard part isn’t buying houses or figuring out the taxes, it’s knowing what you want to do.
Thank you BLL and Mark For you responses. I truly appreciate you sharing your experiences and knowledge.
I am serious about building wealth through real estate. Both Rehabbing and Rental properties. I just have to stop reading about it, Studying it, watching homes come and go and Get off my A#$ and get moving.
I was a bit confused about the Tax angle, I guess that is where a good CPA comes in handy, And curious about whether to just form an entity and get started or just go forward without one.
Thanks for the info
are the cost high for an LLC ?? I think its $150 to form a LLC here in michigan and theres a small fee every year to keep it established. Is there something i’m missing here ??
I’ve always thought an LLC is the way to go. Gives you some privacy and you can get credit in the business name also.
After paying the increased cost of legal work, the registered agent fee, and the cost of incorporation, most investors end up with an LLC that does nothing, except waste time and money. That’s no bargain.
There is no privacy if you must disclose your address in the public record, which some states require, but it’s not an issue if you conduct business in a state with weak disclosure requirements.
I don’t understand this business credit argument. I have yet to meet anyone that used business credit to build a successful business. They use local/regional banks, where they can deal with the same person on every deal.
There is no privacy if you must disclose your address in the public record, which some states require, but it's not an issue if you conduct business in a state with weak disclosure requirements.
I don’t understand this business credit argument. I have yet to meet anyone that used business credit to build a successful business. They use local/regional banks, where they can deal with the same person on every deal.
Well if you start an LLC you can get a new buisness loan based on your credit score and it doesn’t count against your personal credit. so you could have more borrowing power. that’s one way it helps. also business credit cards. again doesnt effect your personal credit, more leverage.
I assume you want something more than operating in a business name. If that’s all you want, a DBA does the same job for a fraction of the cost and has the same benefits of an LLC. However, you need a attorney to represent the LLC in legal matters in most states. A DBA doesn’t.
If you want real protection, you need an attorney to integrate the LLC into the rest of your plan and one to draft your operating agreement. Every case where an LLC failed traces back to a poorly drafted operating agreement or an inappropriate plan. Filing papers with the state is about 1% of the work and fairly straight ward, but DIY people still screw it up, like the guy who became personally liable for LLC debts for no other reason than filling out a form incorrectly. I doubt he feels he saved any money setting it up himself.
Setting up an LLC (drafting the operating agreement and explaining legal responsibility) is considered the practice of law and a CPA would need a law license in order to do so without breaking the law. He can file the forms on your behalf, but that is so easy there’s no reason to pay for it unless it is part of a package. Even if it were legal, a CPA, as well as other lay people, have minimal, if no, training in bankruptcy law, debtor/creditor law, corporate governance, contract law, estate planning, succession planning, and just about every other area concerning an LLC outside of taxes.
I would not hire a CPA just to do taxes. The value in a CPA is offering tax advice in structuring deals relative to your individual situation. Return preparation is just a courtesy and simplifies the process because he is already familiar with your situation. He also works with the attorney who sets up the LLC to determine the best tax planning for your situation.
Let’s add some perspective. An LLC is only needed when a creditor has a judgment and is attempting to collect. It doesn’t prevent a lawsuit. In fact, filing a lawsuit is so cheap and easy, most attorneys file before they do an asset search. It doesn’t make you more professional as attorneys know the majority of LLCs are set up and/or operated incorrectly. An LLC doesn’t dissuade them and actually encourages them if it is a DIY situation. Some people are actually stupid enough to admit in court that the reason for the LLC is asset protection and are shocked when the judge rules against them based on that admission. It is the difference between losing everything and keeping what you have. This one area to make sure everything is done properly. Saving a few dollars shouldn’t be a high priority given the risks.
This is not a concern with local banks. I like to work with people who make decisions, not big bank loan officers and underwriters who are slaves to a corporate policy that was designed for economies of scale. A local bank will give me the funding if the deal is good. They don’t care about entities or rigid formulas.
I’m only opposed to them when they are inappropriately used, which is the case for the majority of real estate investors, especially the ones that think transferring property into an LLC for protection from lawsuits is actually legal. Unfortunately, too many only find out the truth when the judge rules against them. LLCs are like any other tool. They should only be used by individuals who know how to use them appropriately.
Investment property held in an entity has a mortgage in the name of the entity. My point is an entity is not required to get financing. I get more from a solid business plan, a track record of success, and a close relationship with bankers/brokers than I do from these business credit schemes. They are just another guru sham as far as I’m concerned.