subject: Should You Incorporate Before Doing Deals? [print this page] I am going to answer a question that were posted on my YouTube channel concerning whether it's a good idea to incorporate first or to do real estate deals first.
The exact question was,
"Would you recommend first becoming incorporated/LLC and building a team of tax returning real estate brokers, etc. or just jump in and find houses and buyers."
I want to first start this article by saying that anyone who seeks tax or legal advice should contact a legal professional. I am not a legal profession. I personally think it is always a good idea to do business through a business entity such as a corporation and/or a limited liability company (LLC) due to the asset protection and tax benefits you receive. But, if you cannot afford to form a business entity right now, here are my recommendations.
First, I am going to make the assumption that your question refers to "flipping" real estate. Keep in mind there are two types of flippingwholesale flipping and retail flipping. Wholesale flipping, which is sometimes referred to as quick-turning or wholesaling, is when you find a bargain property, add a small profit to it, and then sell it another investor who will rehab the property. You can also flip it to an end-buyer who would live in it if it is ready for occupancy.
Retail flipping is when you buy a property, rehab it, and the sell it to an end-buyer. This method has become popular from the exposure on television shows such as "Flip This House". The potential for a bigger profit is greater.
Now, if you are going to do some wholesale flipping (quick turning), then you can probably do a couple of deals first before forming a business entity. There is little risk in wholesale flipping. You are merely signing paperwork and profiting from your knowledge of the market and the knowledge of what your buyers want.
Now, if you are going to do some retail flipping, I would highly recommend setting up a business entity first due to the greater risks and greater potential for tax liabilities. You may have risks such as contractors getting hurt while working for you or code violations and/or fines. And since you may have bigger profits, you will probably have bigger taxes to pay. When you have a properly structured and properly operating business entity, your risks and tax liabilities will be lowered. Without a business entity, you stand to be exposed to lawsuits that could, with a loss, mean your personal property such as your home and car could be taken away. Additionally, if have a job, your wages may be attached to pay off the lawsuit.
If you are a new investor, I would highly recommend doing the wholesale flipping first because it has lower risks and it will give you some good education about the real estate business in the form of "real-life education". You will be able to do deals quicker and make money quicker. Retail flipping is more complicated and again it has more risks. Go out there and find buyers using some of the techniques I talked about in my articles and videos on how to build you buyers list at http://www.therealestatedealer.com/video. Build relationships with your buyers so that you will know what they want to buy. Do some wholesale flip deals and raise money. Once you are comfortable with doing those types of deals, then you can move to the more lucrative retail flipping.
Should You Incorporate Before Doing Deals?
By: Richard Woodfork
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