Posted by Merez(IA) on August 22, 2005 at 22:16:06:
Hello,
as per my usual when asked these sorts of questions, I’ld suggest that you consult with your accountant, and if you don’t have one, you really new to find one knowledgable about such things.
That being said, one of the advantages of a llc is that you don’t have to prorate income and deductions based on ownership percentages. I’m sure about that point, but I’m not sure if that is covered in the formation papers or if the owners can adjust it on a year to year basis.
It sounds like the third person (loaning the money) will be a limited member/partner with guaranteed payments and sharing the income, correct? It seems that you could set it up so that they get the guaranted payments or that it could be an actual loan to the company (interest only at a set percentage). Again, more information about all involved is needed to make recommendations, but I hope I’ve provided some things to mention to your accountant.
Oh, the dealer status is covered in part in some of the articles on this site:
My 2 partners and I (1 of us is RE agent) are interested in flipping properties. But not sure of which structure to use S, C or LLC. Two of us will be active in the flipping/rehabbing and we’re considering an LLC because we are contributing only a small amount of seed money but doing most of the work. It’s our understanding that profits from an LLC are NOT prorated based on your investment/basis. Is this correct? The third partner will be loaning the LLC the capital required in exchange for fixed interest only payments on his money and 20-25% of the net income. Are we headed in the right direction? Been reading some post regarding dealer status but not quite sure what this means or where to find out more. Any help would be appreciated.
Also 2 of us are in CA and 1 in AZ which is where we will be doing the bulk of our flips. In which state do we create the entity?
Dealer status can cause profits to be taxed as ordinary income instead of at capital gains rates. I believe the status is determined by the number of hours spent in the business per year. You can do a search on www.irs.gov. I wouldn’t recommend doing it late at night unless you’re having trouble sleeping.