Do You Need an LLC to Wholesale Real Estate?

Setting up a limited liability company (LLC) to wholesale real estate is one of the easiest ways to build a successful real estate business.

In fact, forming a real estate LLC is one of the simplest ways to protect your personal assets in the event your wholesaling business is sued. Read on to learn why it’s best to use an LLC for wholesale real estate dealings.

Recommended: Use ZenBusiness ($39 + State Fees) to form your real estate LLC for you.

Benefits an LLC for a Wholesale Real Estate Business

The benefits of starting an LLC for wholesaling real estate outweigh any disadvantages. Some of these advantages include:

  1. Limited Liability Protection
  2. LLC Taxation
  3. Hybrid Business Structure
  4. Loan and Mortgage Eligibility

1. Limited Liability Protection

If your business faces a lawsuit or you have unpaid creditors, forming an LLC helps protect you from personal financial loss. As the owner of an LLC, you might lose business assets as part of a lawsuit, but your personal assets (e.g., your home, your car, your bank account, etc.) and your reputation are protected. That is one of the most primary benefits of having an LLC.

Forming an LLC also unlocks your capacity to open bank accounts, enter into contracts, hire employees, and get business licenses and permits without personal liability.

Find the right broker to work with your wholesale real estate LLC. Read our guide to Best Mortgage Lenders for LLC Owners for more information.

2. LLC Taxation

Unlike a corporation, an LLC’s default tax structure is not subject to double taxation. This means that instead of having to pay corporate taxes, all of the house flipping business’s profits and losses will pass through to the owners of the LLC. This is called pass-through taxation, in which owners can report profits or losses on their personal tax returns instead of having to file separate complicated returns.

Once your LLC starts making a significant profit, you may also want to be taxed as an S corporation (S corp).

Recommended: Learn more about how and when to elect S corp status for your LLC with our guide.

An LLC with only one owner/member is called a single-member LLC. A single-member LLC is by default considered a disregarded entity by the IRS, so there are no federal tax advantages; however, the owner will still have the liability protection of the LLC as long as they maintain their corporate veil.

3. Hybrid Business Structure

An LLC combines the protection of a formal business structure with the flexibility of an informal business structure.

Advantages of Forming an LLC vs. Using an Informal Business Structure

LLCs have an official entity name registered with the state. This can make branding your real estate business much easier. A sole proprietorship or partnership will have to use their surname as their entity name unless they file for a "doing business as" (DBA) name.

Recommended: Find the right name for your real estate LLC with our free business name generator.

Additionally, as a formal business structure, an LLC offers more credibility with both consumers and institutions. In other words, an LLC may have more financial opportunities than a sole proprietorship or partnership.

Advantages of forming an LLC vs. a Corporation

An LLC provides some formal structure to your business, but it’s much simpler than a corporation — another formal business structure.

An LLC has fewer regulations than corporations, such as:

  • Simpler formation requirements with the state
  • No required annual meetings
  • Simpler recordkeeping rules
  • Your LLC can purchase another LLC
  • Your LLC can be owned by another business or LLC

Additionally, where a corporation has bylaws, an LLC uses an operating agreement. An operating agreement is an internal document that formalizes things many businesses may not think about initially, such as dividing responsibilities, profits, and losses, or what will happen if there are disagreements or if someone wants to leave.

While only a handful of states require LLCs to have an operating agreement, we recommend that every LLC have one. Creating an LLC operating agreement sets up rules and a framework that can minimize expensive conflicts later.

Recommended: Use our free tool to create a custom LLC operating agreement.

4. Loans and Mortgages

Without some form of official business entity, you may find very limited funding available to you.

Both banks and other investors may be reluctant to loan or invest money in a sole proprietorship or general partnership. They often feel more confident investing in or loaning money to a business entity such as an LLC.

Moreover, if the LLC has trouble repaying a loan or mortgage, your own assets are protected. Learn more about the different types of home loans available to business owners by reading our guide to Types of Mortgages for LLC Owners.

Use our step-by-step guide to Form an LLC yourself or use our guide to the Best Real Estate LLC Formation Services and let a professional form your LLC for you.

Is There Any Reason NOT to Form an LLC?

While there are many advantages to forming an LLC, there are some drawbacks:

  • Although it’s far less complicated than forming a corporation, some paperwork is involved in forming an LLC
  • You might have to pay a slightly higher interest rate as an LLC
  • LLCs have annual fees in some states. Learn more in our LLC cost guide

However, for real estate investors, the benefits of forming an LLC are usually worth it.

Recommended: Read our review of the best professional services to start your LLC.

How to Use an LLC for Wholesale Investing

Wholesaling is all about bringing together a homeowner and an investor. You make a profit for facilitating this transaction. One of the keys to successful wholesaling is locating off-market properties that will be attractive to investors and negotiating a purchase and sale agreement.

In this process, you want everything to be as seamless as possible for the homeowner. An LLC ensures that once you enter the purchase and sale agreement, the wholesale transaction is secure.

Using an LLC to Enter the Contract

When real estate wholesaling, you will enter a purchase and sale agreement with a homeowner. This will give you the right to purchase the property at a set price or locate a cash buyer to take your place in the agreement. If a cash buyer takes your place in the agreement, the contract must be opened up to allow changes to be made. At this point, the current homeowner can also decide to make changes to the contract, including the price.

To avoid this situation, savvy wholesale investors start an LLC that enters the contract with the homeowner. When a buyer is located, instead of making changes to the contract with the homeowner, you can transfer the LLC ownership to the buyer for a fee, thus avoiding any last-minute contract changes by the homeowner.

For transparency, you should always explain this to the homeowner, but knowing the deal can proceed without unforeseen changes to the contract will facilitate the wholesale transaction.

Double Closing on Wholesale Real Estate Transactions With an LLC

Another way wholesale real estate investors commonly use an LLC is for double closing a wholesale transaction. A double closing is when you buy and sell a property at the same time. In other words, the original homeowner sells the property to you (investor one), and you immediately turn around and sell the property to the final buyer, usually another investor.

When this is done with a real estate LLC, the name of the owner on the title does not need to be changed twice. You enter the purchase and sale agreement with your LLC, complete the purchase with the original homeowner, and then sell the LLC to the final buyer.

Having a real estate LLC allows you to use strategy, allowing you to earn even more while double closing on a property.

Recommended: Learn about the top 5 real estate LLC formation services.

Conclusion

An LLC provides legal security and flexibility for your real estate investing business. A real estate LLC will streamline the business structure so you can focus your time on real estate investing— from researching neighborhoods and zoning, networking with other investors, and building the knowledge and connections to grow your real estate wholesaling business.

In wholesaling, an LLC provides valuable flexibility to fulfill your obligations to the original homeowner and the final buyer. It protects your transactions and gives you more opportunities to wholesale multiple properties securely. Forming an LLC will help increase your wholesaling opportunities and return on investment.

Recommended: Learn more about the cost of hiring an LLC formation service.

Best LLC Services

Frequently Asked Questions

How much would it cost to start a wholesale LLC in real estate?

The cost of starting and maintaining an LLC varies by state and is usually inexpensive.

Visit our LLC Cost guide and choose your state to learn more.

How much does the average real estate wholesaler make?

Real estate wholesalers make an average of $3,000 to $10,000 per wholesale real estate transaction. This varies depending on the type of property and its value, the local market, and the wholesale transaction. Keep in mind that a wholesaling transaction can take place in as little as a few weeks, and a skilled wholesaler could be working on more than one transaction at once.

Do I need an LLC for real estate investing?

While you can invest in real estate as an individual without a business structure, we strongly recommend starting an LLC. An LLC structure is fast becoming the first choice of real estate investors for personal liability protection, pass-through taxation, and all the other benefits listed above.

Can my LLC have more than one owner?

An LLC can have one or more owners, who are known as “members.” It is called either a single-member LLC or multi-member LLC based on the number of members.

Can I add a property I already own to a new LLC?

You can, but it is better to create the LLC before buying the property. If you buy the property first and then create the LLC, you will have to transfer ownership from yourself as an individual to your new LLC. You can do it, but the process involves a few hurdles:

  • The bank financing your mortgage may want to charge you a different interest rate, probably a higher one.
  • If the loan or mortgage is in your name, when you transfer it to the LLC’s name, the mortgage company could look at that as a sale and may call in the loan. Contact the mortgage company and explain the situation. You might be able to transfer the loan to the LLC, or you may have to refinance.
  • Converting the property to an LLC after you purchase the property could trigger new taxes, specifically a Title Transfer Tax.

Therefore, we recommend forming the LLC when you are in the planning stages of buying. The LLC should make the actual purchase.

How do I form an LLC for wholesale real estate?

You can read our simple guide to forming an LLC in your state. You can also read our review of the best professional services to start your LLC.

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