Many flippers are single-person or husband-and-wife businesses that operate as sole proprietorships. In general, this kind of business would benefit from setting up a limited liability company, or LLC, for these reasons:
- Limited liability: If you get sued because your business defaults on a loan or a person gets hurt on your property, the plaintiff can only attack the assets owned by the LLC. Contrast this to a sole proprietorship, which provides no limitation on liability and puts the defendant’s personal assets at risk.
- Tax breaks: LLCs are eligible for certain tax breaks beginning in 2018. Specifically, 20 percent of the LLC’s gross income is tax deductible under the new tax laws. That’s a very solid motivation to set up an LLC.
- Pass-through structure: If you currently run a sole proprietorship, you can set up an LLC easily with minimal effects on your tax filings (except for the extra tax break). The LLC is considered a disregarded entity for sole proprietors, meaning you don’t have to file any special forms for the LLC. Instead, all the revenues and expenses pass through to the LLC owner, and taxes can be filed on Form 1040 and Schedule C. The LLC pays no taxes on its own. If you have employees, the LLC will have some additional filing requirements, but the pass-through structure remains the same.
Setting up an LLC is pretty easy. You can do it yourself, but if you want some expert guidance without spending a lot of money, consider legal assistance companies like LegalZoom and Nolo. The process is straightforward:
- Pick the state in which you want to set up the LLC. This is normally the state you operate in.
- Pick a name for your LLC. The assistance company will quickly check to see if its available.
- Fill out some paperwork that the assistance company will use to prepare the various federal and state applications you will need. For example, most states require you to get a business license to operate. You will have to sign the applications before they are submitted to the various authorities.
- Obtain an Employer Identification Number (EIN) from the federal government. You use this instead of your Social Security Number on your Schedule C. Usually, the assistance company will procure the EIN on your behalf.
- Wait about a month or two for all the applications to be processed.
That’s it, a very simple process. Prices are low, ranging from $75 to $450 for most assistance companies. The more you spend, the more the company will help, a good bargain if you are a busy flipper.