Despite the many arguments for forming a legal entity for wholesale real estate and the many tangible benefits, why do some investors still go without it?
Forming a corporation, LLC or other form of legal partnership is not only fraught with benefits for the home wholesaler, it is one of the first and most fundamental steps for any new entrepreneur or business. So what’s holding the potential real estate investor back from this smart first step?
Few would argue that they weren’t recommended to do this, so it’s not a lack of knowledge. Some may simply be confused and overwhelmed by the various options they have or don’t know where to start. Some may just think that they can get away without it. However, the reason given by most is that they are trying to save costs.
Funny enough for all the benefits wholesale set up this way offers it’s actually one of the quickest and simplest parts of starting any form of investment or real estate business. For most investors it is simply a matter of hopping onto the web. In most states and even in other countries today, an LLC, corporation or foreign equivalent can be created and filed in minutes via a mobile device. While some of the more exotic locales may cost more to file, in most US states it will cost no more than $100. Of course some and especially those with partners would be wise to consult a lawyer or professional founding service to help them, but it quickly becomes second nature and seasoned professionals file for it themselves all the time.
Apart from staying organized, keeping things official, saving confusion and bickering with partners later, increasing credibility with prospects, investors and vendors or even getting access to additional funding through business credit, the biggest advantage of merging is the financial savings it provides.
Without crossing the line to provide tax advice as everyone’s circumstances are different; operating and flipping a house through a legal entity often provides an added layer of protection from taxes or at least a deduction.
Then, perhaps the most significant wholesale benefit is liability and asset protection. Investors are high-profile, appetizing duck targets for all kinds of dangerous, reckless, and opportunistic lawsuits. Legal entities can provide a critical barrier of protection to separate personal and business matters so that things are never at risk at the same time and actually serve as a serious deterrent to scaring away predators. This applies to a wide range of issues from making a business mistake or incurring a loss to being a party to a divorce or the victim of a personal liability lawsuit.
Some things don’t come cheap, and if you’re being frugal, they can end up being pretty expensive. In fact, many top professionals have multiple entities set up to do business.