Flipping houses can be a very lucrative business, but a large piece of the puzzle that can be the deciding factor on just how profitable it can be is how your business is legally structured. There are different implications for the different legal structures, and for house flipping, setting up your business as an LLC is good for asset protection.
Why is this important? Mainly because an LLC (which stands for limited liability company) sets up a legal barrier between your business and your personal finances. Without an LLC, if you are sued and you don’t have your business legally structured, that everything you own is potentially targeted as collateral for a legal judgement against you. If the judgement goes poorly, then say goodbye to your personal assets (like your car, your house, your belongings, etc.). An LLC stops all that from happening.
So, if you’re serious about making real estate flipping into a serious business (and money-maker), then doing something like arranging your business as an LLC is essential. It should be noted that some states differ in how to set up an LLC (such as in New York, where you are required to publish an LLC formation public notice). Generally, the steps are the same or very similar between states.
Here’s a good look at how to set up an LLC for real estate flipping:
Pick A Name For Your LLC
Your business needs a name. It can be whatever you want, provided it hasn’t already been taken. It can be your name, something to do with the market you work in, something direct (like Flipping Houses LLC), or something that has personal meaning to you. As long as you don’t steal someone else’s name, you can name it pretty much whatever you want and just add LLC to the end (or you can actually write out Limited Liability Company).
Collect And Complete The Necessary Formation Documents
LLC formation documents are how your business is actually established as an LLC, legally speaking. Since every state has its own LLC formation documents, it’s important for you to get the right ones. Sometimes they are also referred to as articles of organization, a certificate of formation, or certificate of organization. You can download the right LLC forms from a variety of online resources. Just make sure that you are using the right forms for the state in which you’re doing business.
On these forms, you will need to state the business purpose: either general or specific. General basically states that your business will perform “all lawful business.” Specific means, in certain states, that you will need to list all goods and services that your business will provide.
You’ll also need to select a registered agent or hire a commercial registered agent. Eligible registered agents accept legal documents sent to your business. They have to have a physical address in the state where you’re doing business – a PO Box doesn’t count. Additionally, hire an organizer to make sure the forms are prepared correctly, and ensure that the final documents are signed.
Finally, choose a management structure for your LLC. This can either be member-managed or manager-managed. The first means the business is managed like a partnership, and the latter means its runs like a corporation. If you choose member-managed, then you’re going to have to list information on all involved LLC members.
Once the rest of the information is entered into the forms, you need to file them with the state. You can mail them or you can choose to submit them online. These go to the Secretary of State for whichever state you are doing business in (except Arizona, Florida, or New Jersey – in that case, they go to a different state agency). There will be a fee for filing.
Wait For Your LLC To Be Approved
Again, it depends on the state, but it usually takes about 4-6 weeks for your LLC to be approved. You should build this into your schedule when developing your business and fill the time with getting other things in order (like selecting proven contractors, agents, and others for your network).
Once you have approval, congratulations! Your LLC has been formed and your personal assets are now protected legally.