So I am a new REI and planning on flipping and doing short sales. I have a partner that is going to be over the GC and the he is going to have his father finance the projects while I handle all the paper work, cash flow charts. ect. We are planning on building up the company for about 2 years leaving about 50% of the profits in the business account to use for future financing projects so his father does not have to help finance. Can a seasoned profession please answer the following questions.
Is it a good Idea to set up an LLC if you are flipping properties and doing short sales with a partner. Also how should we include his father, the financer, into the busines so he can have some tax advantages from his profits on the flips.
Should we us the Tax option of an S-corp for the LLC since we want to keep most of the money in the company to use for future projects?
With my scenerio how would you structure the business and structure the tax situation.
You should definitely document everything: who does what, who provides how much, what happens if someone wants out early, etc. Do it now while everyone is trying to make it work. An LLC or partnership is definitely something to pursue further.
You will pay taxes whether you retain the earnings or distribute them. My personal choice is to tax as a partnership, but each of you should review the possibilities with your tax pro.
There will be no tax benefits when flipping homes. Flips are not capital gains. It is considered ordinary income, subject to income and self-employment taxes. Total tax burden will be in the 45% range.
Read that last paragraph again.
LLC is a stronger form than partnership, as discussed on other threads.
Taxing the LLC as a partnership or S-corp will have zero impact on the above taxes. Taxing the LLC as a C-corp may lower taxes on the income, but will make it more difficult to get cash out of the company. However, there are other strategies you can employ here: company car, healthcare, medical reimbursement, retirement plans, etc., that can “pay” you without taking a salary or calling it a dividend.
Also note that IF the LLC can afford to pay you a salary, THEN you may be able to save a portion of the SE tax. But only IF you can afford to pay yourself a regular, W-2 salary.
Your best solution will depend on your specific circumstances, but I usually recommend taxing the entity as a C-corp as long as you can leave the cash in the company. When you can afford to pay a salary, you can convert to S-corp taxation.