If you are considering setting up an LLC to operate your fix-and-flip business, know the answers to these 7 questions before you get started:
What is an LLC?
LLC stands for “limited liability company,” and it is a legal entity that can be used to run a business or hold valuable assets such as real estate, vehicles, boats, or aircraft. An LLC’s owners are called “members.” An LLC that one person owns is called a single-member LLC, and if there two or more members, it is called a multi-member LLC.
Why do I need to form an LLC for my fix-and-flip business?
The number one reason to form an LLC for your fix-and-flip business is asset protection. When you do business as an LLC, you create a wall of legal protection between your fix-and-flip company and your own personal assets. If you do business without the protection of an LLC and your business is sued, your home, vehicles, bank accounts, jewelry, and other things of value you own can be at risk of being seized to satisfy any legal judgment against your company. If your fix-and-flip business is sued while operating as an LLC, creditors are limited to attacking the LLC assets and cannot come after your personal assets.
How is an LLC Different from a corporation?
- LLCs are inexpensive to set up compared to corporations.
- LLCs do not need a board of directors; corporations do.
- LLCs do not have to hold board meetings; corporations do.
- LLCs don’t have to keep minutes from all meetings; corporations do.
- LLCs aren’t subject to double taxation; corporations are.
- LLCs can distribute profits in any way they want; corporations can’t.
These differences in structure and flexibility make LLC’s a popular choice for fix-and-flip investors.
What will it cost me to set up an LLC for my fix-and-flip business?
Ranging from $50 to $500, set-up costs will vary by state, but in most cases, you will pay a one-time filing fee to form your LLC, and once established, an LLC is typically low maintenance with minimal requirements to keep it active. You may need to pay an annual fee and send in an annual report (depending on the state), and you will be required to file state and local taxes.
How do I form an LLC for my fix-and-flip business?
The steps to form an LLC vary by state; for example, New York requires that you publish a public notice of LLC formation, but generally speaking, you will need to:
- Decide on a name for your LLC.
- Prepare all required formation documents.
- Submit all required formation documents
- Pay the filing fee
- Wait for approval
Should I form the LLC for my fix-and-flip business in Wyoming, Nevada, or Delaware to save money?
Although corporations can and do benefit greatly from existing legally in a "corporation-friendly" state, legal experts disagree on whether it is worth the savings to form an LLC outside of the state in which you will be operating your fix-and-flip business. Talk to your tax attorney about the cost/benefits you might incur by operating as a foreign entity (an LLC formed outside of your state is considered "foreign").
Do I need to set up an LLC for my fix-and-flip business to qualify for hard money financing?
Although there are hard money lenders who will approve a borrower operating their fix-and-flip business as an individual, forming an LLC may improve your odds of qualifying for hard money financing.
At Anchor Loans, we lend to experienced individuals without LLCs in Arizona, Florida, and Nevada if they can show past success purchasing, rehabbing, and re-selling properties. In all other states where we lend, prospective borrowers must be a corporation or multi-member LLC to be eligible for an Anchor Loan—with one exception—in California; we will lend to an individual or sole-member LLC if they have conducted more than five successful property transactions in the preceding 12 months.
Are you in need of financing for a fix-and-flip investment project? Anchor Loans would love to begin a relationship with you. Learn more about beginning your fix-and-flip journey, and let us know when you’re ready to get started.
NOTE: The contents of this blog post do not constitute legal or tax advice. It is for general information and educational purposes only. If you need legal or tax advice, please consult an attorney or qualified tax professional.