How many LLC's?

[TaxTime829]

I have a client who wants to start an LLC to invest in real-estate... flip houses. This seems easy enough but I don't know how to set it up.

Questions:
1. Should each house have it's own LLC?
If so... does each house need its own checking account to keep from co-mingling funds?
If so... how does the client allocate expenses to different homes that are in the pipeline?
Some expenses are house specific... some expenses are shared by all the houses... like a roofing nail gun.

2. What about tax returns?
Does each house need a separate Sch-C?

3. Is there a way to keep each house separate in terms of liability... but make the bookkeeping simple?

[Roberts]

So if they are flipping houses, you think it is reasonable to set up an LLC and banking account for each house they flip?

[TaxTime829]

Not sure... the setup of the LLC's is my question. The client has mentioned he does not want a lawsuit from one house to effect other houses he is working on at the same time. I don't know another way to individually protect each house unless there is an LLC for each house... do you know another way?

[Black Bart]

Gosh, I think you're breaking new ground here. I once had a "flipper" client who opened a new bank account every time he started on a new spec house and I thought he was unreasonable. Hauled in a big garbage sack full of unopened bank statements at year end.

But this is a bit much 'cause once they make a good haul on one house, greed looms, ambition blooms, and it becomes real-life monopoly. You'd soon be awash in paperwork with multi-LLCs. I think I'd say "no" to that.

For alternatives, a savvy lawyer once told me it doesn't matter what the entity is, a lawsuit is going to name all hands and the cook (the company/companies, you, your spouse, your kids, your dog, all friends, and a mistress if they can find one). He suggested a million-dollar liability policy was the best defense.

[TaxGuyBill]

For alternatives, a savvy lawyer once told me it doesn't matter what the entity is, a lawsuit is going to name all hands and the cook (the company/companies, you, your spouse, your kids, your dog, all friends, and a mistress if they can find one). He suggested a million-dollar liability policy was the best defense.

That was my thought too. A good insurance policy would be a great idea.

BE VERY CAREFUL about giving legal advice about forming LLC's and liability. Liability planning is NOT the job for tax professionals, and wrong advice could get you into BIG trouble. The taxpayer may also want to consult a business lawyer. Any advice that you do give you may want to put in writing and include a CLEAR and PROMINENT disclaimer that this is not legal advice and the taxpayer should consult a lawyer.

[John of PA]

Each house should be in a separate LLC if you want a lawsuit re: a property to be isolated to just that property. Then set up another LLC as a Real Estate Management Company which will collect the rent and pay all the bills. The Real Estate Management Company leases each property with a net lease. Draws out the the Mgt. Company (transfers to the owner) is rent paid for the property. A lawsuit then must penetrated through the Mgt. comapny and the ownership LLC before getting to personal assets. This setup is very common. Google Real Estate Management Company. Happy Thanksgiving to all.

[geekgirldany]

@John, would that really apply in this situation? The client is flipping houses not renting them.

I have a client that has around eight rental properties. She asked me about doing an LLC for each one. I told her what I thought but she needed to consult an attorney. I suggested that she get an insurance policy on each property. That is how many of my other clients do it as well.

I would think he would need some kind of insurance policy anyways while building the houses. As Bart posted, an good lawyer will list everyone and his brother connected to the property if they want to sue. So you can try to shelter as much as you can but in the end you better have some extra to cover your assets like insurance.

You can also google flipping houses separate LLC for each house, alot of topics come up. But definitely tell him to consult a lawyer on this.

[taxxcpa]

I have a client who has three aircraft which he uses to give flying lessons. He gave a lesson to a lawyer a few years ago who advised him to set up an LLC. He ended up setting up one for each aircraft. I warned him that his personal liability would not be covered and that he needed insurance for that purpose. He agreed and said he had already obtained insurance.

[Black Bart]

I have a client who has three aircraft which he uses to give flying lessons. He gave a lesson to a lawyer a few years ago who advised him to set up an LLC. He ended up setting up one for each aircraft. I warned him that his personal liability would not be covered and that he needed insurance for that purpose. He agreed and said he had already obtained insurance.

I still set up LLCs for sole proprietors believing that some legal shield helps even if they do get insurance (I'm assuming the original poster, and you, were referring to a sole proprietor).

Are you saying that you know for sure that LLCs for sole proprietors are completely worthless for personal liability protection? Do you know if it's that easy to "pierce the veil"?

Just asking (not challenging), but I don't positively know anything more about the personal liability than my above post. I'm curious and was wondering if you have had personal experience, or is it (like mine) lawyer's advice, or do you know from some other source?

Thanks.

[MDEA]

Llc

In the quoted situation he is giving the lessons so he is still personal liable.If he had an employee the LLC would protect him.But I still recommend insurance.

[Gretel]

Liability

My two cents on liability issues for SMLLC's. Each state has their own rules, some might have better protection than others. Protection follows the same rules as corporation protection: Individual needs to have name LLC on all documents, business cards, bank statements, deeds, etc. plus needs to hold himself out to customers and suppliers as such. Probably would need to set up different supplier accounts for each LLC unless contractor is hired and his individual LLC's are billed. No intermingling of correspondence. Don't know how anyone would want to keep this straight but I do not see any other way to have this more bulletproof.

Thinking about this, I do not really see were the big problem is, unless clients flips a number of houses at the same time. As soon as a house is sold, liability issue is gone. If he is pretty much doing one at a time, one should think that he has one on the market and is working on another one.

[John of PA]

In my view, a Real Estate Mgt. company would also apply to flipping properties. Also I have no problem skipping the LLC route and make sure you have good insurance. Also I agree that going the LLC route should be done with an attorney and not online.

[Black Bart]

To address the original poster's questions more directly...

I have a client who wants to start an LLC to...flip houses...Questions:

1. Should each house have it's own LLC?

Looks like a split decision among the posters. I like John of PA's multi-LLC rent management idea (didn't know they were that common) IF the client's willng to pay you for the time and trouble (your fees could get expensive pretty quick). Also numerous franchise fees might be a factor: ours (AR) is only $150 per entity but others (CA is $800 minimum) are high.

If so... does each house need its own checking account to keep from co-mingling funds? If so... how does the client allocate expenses to different homes that are in the pipeline?

Answers to both questions depend largely on client cooperation. One of mine (one LLC-one bank account) has a great spouse-helper and I don't even see the checks/invoices. She divides/summarizes all expenses and we're ready to file at year end.

My other extreme (much more common) does 3-4 jobs per year; has one LLC but no bookkeeper, 4 bank accounts (why, I can't imagine). Asked to write house #2 or whatever on checks/invoices. Hasn't yet -- says he forgets (hates paperwork of any kind --a problem throughout the industry). I couldn't divide it up if I wanted to-- info simply doesn't exist -- some items purchased by debit card -- bank statements are no help with that -- invoices are mostly unmarked. Everything's in a big box and we file one schedule C. So far, all flips completed in one year (don't know what I'll do when one goes unsold). As for co-mingling of funds, most get a line-of-credit loan to draw against and usually it covers all houses. Clients generally won't make four different deposits or itemize the check/deposit (and for sure-the bank's not going to draw up several sets of loan papers). Also they take money out for personal stuff, or to cover other account overdrafts. Some checks are simply made to "CASH" (you're assured "it was for business."). Anyway, I wouldn't make multi-LLCs for this guy if he would pay me.

Gretel mentioned that liability's mostly gone when the house is finished, but unfortunately, it's during the building that the danger is greatest.

Some expenses are house specific... some expenses are shared by all the houses... like a roofing nail gun.

Just make an "Indirect Expenses" account and split proportionately at year-end.

2. What about tax returns?
Does each house need a separate Sch-C?

Since the sole prop's a disregarded entity, you wouldn't have to, but they're good as a per house P&L (assuming nobody's keeping a set of books for him).

Is there a way to keep each house separate in terms of liability...but make the bookkeeping simple?

I think this question may be a genuine oxymoron (nothing personal ).

[John of PA]

Thats correct, the 1040 tax return will be a lot of work becasue there will be a Sch E column for each LLC and another column for the Mgt. Company. But almost all the expenses will all be in the Mgt. Co. column. Not sure if it would be much more work than if there were no LLC's becasue you would still have the Sch E columns for each property anyway.

[MDEA]

Llc

If you are flipping the property I see no reason for a Schedule E.The properties are inventory and are reported on Schedule C.