Incorporating a Fix&Flip business

[Christian10895]

I just completed a Fix&Flip and did well. And before I buy the next property to flip I would like to look at the pros and cons of setting up a corporation. I am planning to grow my "flipping business" and also down the road acquire buy and hold.
I would appreciate input on this matter.

Thank you,

Regards,

Christian Gaulin

 

[Matt Crowley]

There might be a case for it if you are hiring a number of outside contractors and want to limit your liability. I'd take a deep dive into the insurance available before incorporating as that is usually a much better bang for your buck.

Personally, I love the simplicity of a sole proprietorship and wouldn't move away from that structure unless it was absolutely imperative. If you are using a mortgage, you will still need to personally qualify for the loan so the corporation only complicates things on that side of the business.

If you are buying the houses cash and flipping them quickly, there could be a case for having that in a corporation. Again, insurance might provide better liability protection.

 

[Tina Myrvang]

Please see the following post by George Dube and Don Campbell:
George Dube – Real Estate Accountant, Tax Advisor, Author and Speaker
Don R. Campbell Blog – Incorporate or Not

Have a great day.

 

[Thomas Beyer]

What benefits do you see to incorporating ? The drawbacks are annual cost and tougher mortgage qualification.

The benefits materialize only if you have significant surplus every year and thus, qualify for the small biz lower tax rate. The second benefit, again assuming sizeable 6 digit annual profits after all costs (incl your wage so you can continue to qualify for a mortgage ) is that you can dividend money to kids or spouse, handy if they ar teenagers or in university when the maximum sucking sounds of cash out of your bank account occurs.


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[Alvaro Sanchez]

I would not mix Fix&Flip (operating corp) with Buy-And-Hold (non-operating corp)..

 

[Thomas Beyer]

I would not mix Fix&Flip (operating corp) with Buy-And-Hold (non-operating corp)..

Why not ?

You classify assets differently. Some as inventory for business income and some as capital for capital gains. Can be in the same company.

 

[Alvaro Sanchez]

You would be exposing your assets (non-operating corp) with operating activities. If you get a lawsuit in your operating business, you could potentially lose assets. The non-operating might hold assets that are not related to current activity.

Why not ?

You classify assets differently. Some as inventory for business income and some as capital for capital gains. Can be in the same company.

 

[Thomas Beyer]

Yes lawsuits are a consideration. But you can be sued if the house is flipped or a ten year hold. Depending on asset value it may or may not be practical or cost effective to have one corp per asset owned.


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[Alvaro Sanchez]

My comment was in reference as he is planning on holding assets on the corporation as buy-and-hold. That is, several assets which are no longer relevant to his flips activities so if he mixes both operations on a single corporate entity then he is exposing the assets unnecessary. In fact, some accountants recommend that if you have a holding corporation with total assents 10M is better to split to have 2 corps at 5m each to limit exposure.

Yes lawsuits are a consideration. But you can be sued if the house is flipped or a ten year hold. Depending on asset value it may or may not be practical or cost effective to have one corp per asset owned.


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[Thomas Beyer]

In fact, some accountants recommend that if you have a holding corporation with total assents 10M is better to split to have 2 corps at 5m each to limit exposure.

Exposure to what ?

Legal exposure ? In almost ALL cases you will get sued personally too as a director. You will be exposed in any case, incl personal guarantees for mortgages.

What about tax exposure ?