Once you start working with flip loans, you need to think about how you can protect yourself by registering your business with the state. Having a business entity on the fix and flip loan papers can protect your private assets in case there is an issue with repaying the loan. No one wants to plan for the worst, but it’s better to be protected than not. Most experienced real estate investors will advise you to make a worst-case scenario plan. Even when you’ve budgeted your time and money perfectly, it’s possible for everything to go wrong because of events outside your control.
When you buy a property with the intention of fixing it up and selling it for a profit, you are engaging in a business activity, as far as the law is concerned. Investors who proceed without a legal structure for their business are by default setting up a sole proprietorship or general partnership, if you work with another person. These entities are fairly simple to understand, as all partners have an equal voice in decision making. Taxes are also simple. However, there is no protection from liability. This leaves all partners equally and personally responsible for the business debts of the partnership, or the individual in a sole proprietorship.
Talk to an Attorney to Protect Yourself Before You Get Your First Flip Loan
One way to protect your personal assets is by setting up a limited liability company (LLC). The main advantage is that LLC owners are not personally liable for the company’s debts. You would create an LLC when you file articles of organization with the California Secretary of State. For taxes, each member of the LLC would pay taxes on their individual share of the profits. The LLC does not pay taxes.
We strongly suggest you get in touch with an experienced real estate attorney before you buy your first rehab property. Discuss the best way to protect yourself from problems that can come up when investing with flip loans. Be sure that you and any partners are all on the same page to prevent problems down the road.
If you’re looking for an experienced hard money lender, get in touch with LendingXpress. We’ll be happy to discuss your investment needs and help guide you to the right products.