Setting up an LLC for flipping houses is one of the easiest ways to protect your personal assets. An LLC, or limited liability company, is the legal structure favored by investors to build any successful real estate business.
Forming a real estate LLC is one of the simplest ways to protect your personal assets in the event your real estate flipping business is sued. Read on to find all the reasons why we recommend a formal business structure for your house flipping business.
Recommended: Use ZenBusiness ($49 + State Fees) to form your real estate LLC for you.
Benefits of an LLC for Real Estate Flipping
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.
Learn more about brokers willing to work with business owners. Read our Best Mortgage Lenders for LLC Owners guide.
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 types of home loans available to LLC owners by reading our guide to Types of Mortgage Loans for Business Owners.
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 worth it.
How to Use an LLC for House Flipping
For house flipping success, a real estate investor needs to purchase the property under market value, renovate it, and resell it for a profit. For best results, this process should happen quickly with minimal delays.
The main benefit of a real estate LLC for house flipping is legal protection. Since a lot of work will be getting done in a short amount of time after the property is bought, there is always a possibility of something going wrong.
If someone decides to sue, even without a legitimate claim, it can slow you down and put your personal assets at risk; however, if you operate through an LLC, any possible charges would be against the LLC that owns the house, thus keeping you and your personal assets safe.
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.
Many house flippers prefer to create a new LLC for each new investment property, while others choose to operate all real estate investments under one real estate LLC. However you choose to use it, forming an LLC offers a wide range of benefits to accelerate your real estate investing growth.
Frequently Asked Questions
Do I need an LLC for house flipping?
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.