This is an excerpt from ‘Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business’ by Kirill Bensonoff. Get your free copy by clicking here.
When starting a house flipping business, some individuals prefer to work alone, while others prefer to have another person providing financial and managerial input.
The benefit of having a partner is typically related to scaling: more capital and hands-on-deck means it will be easier to translate a startup to a scaled, efficient real estate business. Real estate investing and business partnerships can be rewarding, bringing advantages to all involved parties, but if not managed well, it can be just as disastrous for all.
To be sure, there are definite benefits to a strategic partnership, including:
- More resources are available to go around, and that doesn’t just mean financially.
- As a less experienced real estate investor or entrepreneur, working with a partner that has a proven track record of experience in the industry could be the difference needed to make the venture successful.
- Risks are divided between multiple individuals rather than the loner alone and so is accountability and tasks.
- By expanding the business to multiple people, you can also stand to gain from any potential partner’s network connections.
Of course, having a partner can also come with its own set of challenges. Any profits made from the venture will have to be shared, tax structures can be slightly more complicated, and decision making will need to involve all parties that have a stake in the business. It’s also important to note that, when dealing with real estate partnerships, there could be consequences for investments if one of the partners chooses to leave.
That’s why, when real estate partnerships are proposed, there are some subsequent actions that need to be taken. Many entrepreneurs starting a real estate business form a holding company that places formal structures and institutes investor protections for all parties.
Structuring Your Business
There are multiple structures available that are suited to real estate businesses: S corporations, C corporations, Limited Liability Partnerships, or, the most common for single-owned businesses, Limited Liability Company or sole proprietorship for single business owners. LLC’s are a popular option as structuring one can be done online or with some assistance from an attorney.
An S corporation is a legal company formation model which provides the partners with personal asset protection while also accounting for incomes and losses made from the business’ operations. S corps also comes with certain tax benefits for entrepreneurs – companies structured under S corporation s don’t pay taxes at the federal level and instead passes incomes and losses made through to the shareholder’s individual tax returns.
C corporations are a less prominent holding company structure, which has in many ways been surpassed by the S corporation in usage. On occasion, rental real estate investors have been advised to structure their ownership under a C corp, but there are less costly alternatives available today. The issue with working under a C corp is that taxable income made under this model is taxed first at the business entity level, and then there are secondary individual income taxes which will also apply. This effectively means double the tax for entrepreneurs, which is a costly and avoidable expense.
Limited Liability Partnership (LLP)
A Limited Liability Partnership involves two partners of a single project and protects them from personal liability in the course of business. LLP structures are particularly known for liability protection in business and business management, even protecting partners from each other.
Limited Liability Company (LLC)
Then, there is the Limited Liability Company, which works similarly to the LLP by providing protection of the business owners’ assets in case any issues occur over the course of operating the business.
Generally, LLCs are often regarded as the best entity for flipping houses, and they are the most recommended choice when structuring a company holding real estate, as they are more flexible for tax purposes. In addition to tax savings, LLC’s are easily registered online by the entrepreneur or can be set up with the assistance of a real estate attorney.
Tax Benefits of LLC For House Flipping Business
1 – Protecting Your Assets:
Without an LLC, your personal assets can potentially be used against you if you run into any legal or financial troubles with your real estate investment. Fortunately, you can limit the possibility of your personal assets being used as collateral for a legal claim. In essence, you can create a clear seperation between your personal assets and the assets owned by the LLC that you have formed.
2 – Tax Deductible Expenses:
Even though the income generated by the business do filter down to the owner of the LLC, so do the expenses. This effectively means that you can treat a number of important expenses, including property taxes, renovation costs and property depreciation, as tax deductible. This article provides more details on how the taxes on flipping houses works.
If a partnership is not for you, there are other business structuring options that can suit your needs. A sole proprietorship is one option, working for single-owner businesses by allowing them to easily report their business income and expenses directly on their personal tax returns.
Whether working with a partner or working by yourself, it’s ultimately important to choose one of the above options for your business to limit your personal liability and protect your assets – good advice in any industry. As much as possible, you want to shield your personal assets from the liabilities that can accompany a business arrangement.