{"id":3173,"date":"2021-04-26T16:38:10","date_gmt":"2021-04-26T20:38:10","guid":{"rendered":"https:\/\/propertyonion.com\/education\/?p=3173"},"modified":"2021-04-29T16:14:34","modified_gmt":"2021-04-29T20:14:34","slug":"do-you-need-an-llc-to-flip-houses","status":"publish","type":"post","link":"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/","title":{"rendered":"Do You Need an LLC to Flip Houses?"},"content":{"rendered":"\n<p><a id=\"post-3173-_n5q1cif6fpbi\"><\/a><br>Do You Need an LLC to Flip Houses?<\/p>\n\n\n\n<p>Being a house flipper is a great way to grow your income without the regular nine-to-five job. However, house flippers work for themselves. It\u2019s essential to have a firm understanding of the importance of forming a business entity before getting started.<\/p>\n\n\n\n<p>While you can legally flip a house without an LLC, it can put your business, personal assets, and family at risk.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 ez-toc-wrap-left counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">In this Article:<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/#Benefits_of_Having_an_LLC_for_Flipping_Houses\" >Benefits of Having an LLC for Flipping Houses<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/#Disadvantages_of_Flipping_Houses_as_an_LLC\" >Disadvantages of Flipping Houses as an LLC<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/#Other_Entities_for_House_Flipping_Businesses\" >Other Entities for House Flipping Businesses<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/#How_Much_Does_an_LLC_Cost\" >How Much Does an LLC Cost?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/propertyonion.com\/education\/do-you-need-an-llc-to-flip-houses\/#LLCs_The_Best_Business_Entity_for_House_Flippers\" >LLCs: The Best Business Entity for House Flippers<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Benefits_of_Having_an_LLC_for_Flipping_Houses\"><\/span><a id=\"post-3173-_vmlr82j1ik1\"><\/a>Benefits of Having an LLC for Flipping Houses<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>You can choose to form many different types of business entities when you\u2019re starting your house flipping business. Individual property investors should select an LLC because <strong>they\u2019re simple to structure and provide tons of benefits<\/strong>.<\/p>\n\n\n\n<p><br><strong><a id=\"post-3173-_od40obq1scfi\"><\/a>Tax Deductions<\/strong><\/p>\n\n\n\n<p><br>The tax benefits are some of the most significant advantages to forming an LLC to flip houses. Common tax-deductible expenses include:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Cost of purchase<\/li><li>Cost of renovation materials<\/li><li><a href=\"https:\/\/propertyonion.com\/education\/you-need-to-keep-your-contractors-on-budget-heres-how\/\" target=\"_blank\">Cost of labor<\/a> during renovation<\/li><li>Vehicle and travel expenses<\/li><li>Office expenses<\/li><li>Cost of building permits<\/li><li>Loan interest<\/li><li><a href=\"https:\/\/propertyonion.com\/education\/should-you-hire-an-agent-or-fsbo\/\" target=\"_blank\">Cost of a real estate agent<\/a><\/li><li>Business expenses<\/li><li>Legal fees<\/li><li>Accounting fees<\/li><\/ul>\n\n\n\n<p>With all of these deductions,<strong> the final profit you make after you sell the newly renovated house will be significantly higher<\/strong>.<\/p>\n\n\n\n<p><br><strong><a id=\"post-3173-_lgrafsrr7bk2\"><\/a>Protection of Personal Assets<\/strong><\/p>\n\n\n\n<p><br>There are risks involved with any business, and flipping houses is no exception. If things go wrong during a deal, setting up your business as an LLC can help prevent your personal assets from being used as collateral to pay back debts.<\/p>\n\n\n\n<p>When it comes to your business and your personal assets, it\u2019s always better to be safe than sorry.<br><\/p>\n\n\n\n<p><strong><a id=\"post-3173-_ogxal8vyo8oz\"><\/a>Flexible Structure<\/strong><\/p>\n\n\n\n<p><br>The flexible structure of an LLC allows your business to adapt over time, including adding new partners as you grow. LLCs enable you to easily add a partner to your business even if your business started without one. This flexibility allows you to continue being an LLC without the need to set up an entirely new business.<\/p>\n\n\n\n<p><strong>Because the LLC is so flexible, it also makes your business easy to sell. <\/strong><\/p>\n\n\n\n<p>If you are operating as an individual and don\u2019t have an LLC, you will not be able to sell your business even if it becomes highly profitable.<\/p>\n\n\n\n<p>Lets You Creatively Buy and Sell Real Estate<\/p>\n\n\n\n<p>Having an LLC hold your real estate means it\u2019s possible to transfer ownership of real estate without a closing. Why is that something you would want to do?<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Skip the closing, sell the business. &nbsp;<\/strong>An LLC can save you thousands of dollars on closing costs by allowing you to easily sell your company, which includes the property, to the buyer. This means that you can sell the house without needing to close, but you will have to sell your company in exchange. Once you\u2019ve sold the first LLC, you can use that money to set up another LLC and move on to your next flip.<\/li><li><strong>Buy and sell in tight situations.&nbsp;<\/strong>There are many times when you are required to hold real estate for months or even a year or more before you can sell within an <a href=\"https:\/\/propertyonion.com\/education\/can-hoa-condo-associations-legally-do-that\/\" target=\"_blank\">HOA or other association<\/a>. You can skirt around this rule if you simply sell the LLC that owns the property to your buyer. The nosy HOA lady won\u2019t even know it changed hands!<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Disadvantages_of_Flipping_Houses_as_an_LLC\"><\/span><a id=\"post-3173-_anf77px82di7\"><\/a>Disadvantages of Flipping Houses as an LLC<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While there are plenty of advantages to using an LLC to flip houses, there are also a few disadvantages that every investor should consider before moving forward with this strategy.<\/p>\n\n\n\n<p><br><strong><a id=\"post-3173-_rhz5lw77yya9\"><\/a>Opening a New Bank Account<\/strong><\/p>\n\n\n\n<p><br><strong>When you form an LLC, you need to open up a new business bank account specifically for your business.<\/strong> Individuals don\u2019t have to go through this process and can use their personal bank account for capital.<\/p>\n\n\n\n<p>Unfortunately, many banks will not lend to an LLC based only on business credit unless the business has an established credit history. If your LLC is younger than two years old, you will have a difficult time finding a lender because banks know that LLC members cannot be held liable for the LLC\u2019s debts.<\/p>\n\n\n\n<p>In most cases, if your business is new, you will be required to personally guarantee the loan in addition to the collateral of your property.<\/p>\n\n\n\n<p><br><strong>Potentially Weak Legal Protections<\/strong><\/p>\n\n\n\n<p><br>Your LLC\u2019s legal protections are only as strong as your founding documents and paperwork. While you may have chosen to form an LLC so that you won\u2019t be held personally liable for debts, courts may choose to hold the LLC\u2019s members personally liable. When this happens, it\u2019s called \u201cpiercing the corporate veil,\u201d and small LLCs are more likely to get pierced.<\/p>\n\n\n\n<p><br><strong>Complicated Legal and Accounting<\/strong><\/p>\n\n\n\n<p><br>When it comes to forming a new business, you\u2019ll have to face legal and accounting complications. Remember, this isn\u2019t the regular nine-to-five job, so you\u2019ll have to report your income and losses yourself.<\/p>\n\n\n\n<p><strong>If you are a single-owner LLC, the IRS will treat your taxes like they would for a sole proprietorship.<\/strong> The LLC itself will not pay taxes and does not have to file a tax return. However, as the sole owner of the company, you\u2019ll report all of your profits and losses when you submit your tax returns.<\/p>\n\n\n\n<p>Because LLC members are not employees and have not made contributions to Medicare and Social Security, you will likely have to pay self-employment taxes. The self-employment tax rate is <a href=\"https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/self-employment-tax-social-security-and-medicare-taxes\" target=\"_blank\" rel=\"noopener\">currently 15.3% of your net income<\/a>.<\/p>\n\n\n\n<p>If your LLC grows enough for you to have employees, this will further complicate both the legal and accounting sides of the business.<\/p>\n\n\n\n<p>Working with both a CPA and lawyer who understand the real estate industry can help you get your LLC started on the right foot.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Other_Entities_for_House_Flipping_Businesses\"><\/span><a id=\"post-3173-_j3pihxo7f89k\"><\/a>Other Entities for House Flipping Businesses<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Other common business entities used by real estate investors are S corporations, C corporations, and sole proprietorships. LLCs are the most popular option because they\u2019re flexible, allowing flippers to readjust their business structure when needed.<br><strong><a id=\"post-3173-_at227adju9pw\"><\/a>S Corporations<\/strong><br>S corporations provide partners within your company with personal asset protection while accounting for incomes and losses.<\/p>\n\n\n\n<p><strong>They also come with tax benefits<\/strong>; companies structured as S corporations don\u2019t pay taxes at the federal level. Instead, they pass income and losses made through the shareholder\u2019s individual tax returns.<br><strong><a id=\"post-3173-_t14jcvd3sf03\"><\/a>C Corporations<\/strong><br>C corporations are a holding company structure. While this model provides personal asset protection, it comes with a significant disadvantage.<\/p>\n\n\n\n<p>Taxable income made under this entity is taxed first at the business entity level, and secondary individual income taxes also apply. <strong>Ultimately, house flippers will pay double the tax. <\/strong><br><strong><a id=\"post-3173-_muuqdx48nves\"><\/a>Sole Proprietorship<\/strong><br>If you don\u2019t have a partner, you can also choose to be a sole proprietorship. This business structure has one single owner, allowing him or her to easily report business income and expenses directly on personal tax returns.<\/p>\n\n\n\n<p>Unfortunately, as a sole proprietor, <strong>you do not have the same protection as you would with an LLC<\/strong>; you would be personally responsible for your business debts.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_Much_Does_an_LLC_Cost\"><\/span><a id=\"post-3173-_x9h16uwisgu\"><\/a>How Much Does an LLC Cost?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Setting up your LLC will cost anywhere from $50 to $500, depending on where you live. In most cases, you\u2019ll only pay a one-time filing fee to form your LLC.<\/p>\n\n\n\n<p>From there, <strong>LLCs are typically low maintenance<\/strong> \u2014 there are just a few requirements to keep them active. You may need to pay an annual fee and send in reporting, depending on the state in which you\u2019re registered. You will also have to file state and local tax returns.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"LLCs_The_Best_Business_Entity_for_House_Flippers\"><\/span><a id=\"post-3173-_oa3j28crp97\"><\/a>LLCs: The Best Business Entity for House Flippers<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While there are tons of options out there for forming your business, an LLC is the most flexible, providing you with liability protection while allowing you to add a partner when necessary.<\/p>\n\n\n\n<p>While you can flip houses without an LLC, your personal assets are not protected, and you could be losing out on valuable tax deductions that can help your business grow.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Do You Need an LLC to Flip Houses? Being a house flipper is a great way to grow your income without the regular nine-to-five job. However, house flippers work for themselves. It\u2019s essential to have&hellip;<\/p>\n","protected":false},"author":24,"featured_media":3176,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[162,144,192,76,338,19,59,54],"class_list":["post-3173","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-articles","tag-fix-and-flip","tag-hoa","tag-investors","tag-legal","tag-llc","tag-loan","tag-risk","tag-taxes"],"_links":{"self":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/3173","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/users\/24"}],"replies":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/comments?post=3173"}],"version-history":[{"count":2,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/3173\/revisions"}],"predecessor-version":[{"id":3175,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/posts\/3173\/revisions\/3175"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media\/3176"}],"wp:attachment":[{"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/media?parent=3173"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/categories?post=3173"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/propertyonion.com\/education\/wp-json\/wp\/v2\/tags?post=3173"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}