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NewChief
02-01-2007, 04:13 PM
A buddy and I (both teachers) are talking about starting a business flipping houses in the summer, probably just a house a summer. What do we need to do as far as starting a business? What is the best arrangement and how should we go about it?

Gracias.

C-Mac
02-01-2007, 04:17 PM
First thing.....lose the partner. :p

NewChief
02-01-2007, 04:21 PM
First thing.....lose the partner. :p

He's got all the tools, or I would. ;)

BTW, he's at the house, and I guaranteed him that "the football chat place" that I hang out at would have an answer for me within 15 minutes. Don't let me down here guys. :banghead:

JBucc
02-01-2007, 04:28 PM
Why would you want to flip a house? Wouldn't the gutters be pretty useless then?







:whackit:

NewChief
02-01-2007, 04:31 PM
Why would you want to flip a house? Wouldn't the gutters be pretty useless then?







:whackit:

Two shitty answers, both from Arkansawyers. Damnit. Not only are you boys letting the Planet down, you're letting our fine state down. BTW, how you guys enjoying the snow? I was able to break my snowboards out and get in some decent turns for the first time in a while. Also having a nice long break from work.

MIAdragon
02-01-2007, 04:35 PM
why do you need a business? You just need to make sure you have contract with your partner on how profits and expenses are divided.

HonestChieffan
02-01-2007, 04:37 PM
do you know anything about houses, repair, and selling said homes?

Can you afford to lose the investment?

recxjake
02-01-2007, 04:40 PM
Be an LLC

JBucc
02-01-2007, 04:40 PM
Two shitty answers, both from Arkansawyers. Damnit. Not only are you boys letting the Planet down, you're letting our fine state down. BTW, how you guys enjoying the snow? I was able to break my snowboards out and get in some decent turns for the first time in a while. Also having a nice long break from work.We have no class so me and a couple of other guys went out and set up a sled bowling thing on the sidewalk but the cops told us to stop. Then we just did some regular snowball fight stuff and went back inside because it's really friggin cold.

BucEyedPea
02-01-2007, 04:42 PM
NewChief I know a few people who have done this successfully.
Lemme get back to you.

There's even supposed to be people that will lend you the down payment so long as you fund the renovations and repairs.

My friend in Boston who teaches, has a car waxing biz in the summer that makes him good supplementary income. He's tied to garage to do it which helps.

C-Mac
02-01-2007, 04:42 PM
First: A Partnership Agreement Contract
.....you will be putting it to use sooner than later.

MIAdragon
02-01-2007, 04:43 PM
Be an LLC

$$$$$$ and time

NewChief
02-01-2007, 04:43 PM
do you know anything about houses, repair, and selling said homes?

Can you afford to lose the investment?

Yes, yes, and yes. We have everything covered except for the business aspects (I know, that's the scary part). We're both good carpenters/remodelers. He's done some real estate in the past, getting rid of his rental property at the moment, actually. Our interest in it is based on our mutual enjoyment of working on each other's houses.

We aren't looking to turn this into a full time thing. We both teach. We just want to make a little extra cash during the summer as well as have something to do that we both enjoy.

HonestChieffan
02-01-2007, 04:45 PM
How much can you lose?

Better know that up front

C-Mac
02-01-2007, 04:45 PM
Second: Make sure that if you loose your entire investment and friendship....you can still survive.

Simplex3
02-01-2007, 04:45 PM
Incorporate as an LLC, but file with the feds as an S-Corp. That'll give you the best tax advantages with the least amount of paperwork overhead while still minimizing your personal liability.

Was I in under 15m?

NewChief
02-01-2007, 04:45 PM
First: A Partnership Agreement Contract
.....you will be putting it to use sooner than later.

Heh heh. That very well could be. The thought of going into business with a friend (and ruining a friendship) has definitely been one of my main worries. The good thing is that we both have other careers, so it's not a life/death thing. We figure that we may even lose money on our first project.

NewChief
02-01-2007, 04:46 PM
Incorporate as an LLC, but file with the feds as an S-Corp. That'll give you the best tax advantages with the least amount of paperwork overhead while still minimizing your personal liability.

Was I in under 15m?

Close. Thanks Simplex. Your ideas on anorexia may suck, but you know your shit when it comes to business (and tax loopholes) ;)

JBucc
02-01-2007, 04:47 PM
Incorporate as an LLC, but file with the feds as an S-Corp. That'll give you the best tax advantages with the least amount of paperwork overhead while still minimizing your personal liability.

Was I in under 15m?45-13=32

MIAdragon
02-01-2007, 04:47 PM
Yes, yes, and yes. We have everything covered except for the business aspects (I know, that's the scary part). We're both good carpenters/remodelers. He's done some real estate in the past, getting rid of his rental property at the moment, actually. Our interest in it is based on our mutual enjoyment of working on each other's houses.

We aren't looking to turn this into a full time thing. We both teach. We just want to make a little extra cash during the summer as well as have something to do that we both enjoy.

na its not it seems you have all the hard parts covered, you do really need to draft an agreement up, please spend the money and have a lawyer do it, its will save you $$$$ in the long run. Its a blast I do it down here in Miami.

recxjake
02-01-2007, 04:51 PM
Incorporate as an LLC, but file with the feds as an S-Corp. That'll give you the best tax advantages with the least amount of paperwork overhead while still minimizing your personal liability.

Was I in under 15m?

an LLC in different then an S-corp.... there are C- Corps, S-Corps, and LLC.... LLC is the best because you are not personally liable for anything

Simplex3
02-01-2007, 04:52 PM
The feds don't recognize LLCs for tax purposes. The reason you go LLC is all the benefits of a partnership (no SEC filings, no officers etc in KS, check a local lawyer to be sure) without any personal liability. Why an S-Corp to the feds? Glad you asked.

As an S-Corp you can distribute half your profits as salary and half as disbursements. This is important because you pay the full-ride 15% for Socialist Insecurity on the salary part. You don't have to pay the match on the disbursements, though, so that only costs 7.5% in SS taxes, saving you 25% on one of your biggest taxes.

The big key here for you guys is going to be the Operating Agreement. I can't stress this enough. The Operating Agreement will spell out in contract form what you can and can't do, if you need the other member's permission or if either of you can do "it" alone, what happens if one of you leaves, or gets an extended illness, or dies. It will also spell out things like whether or not you can take a loan out or otherwise encumber your ownership percentage. There are literally hundreds of things you're going to need to think about here, and since it's a contract between two individuals your state is going to have some guidelines of things that are and are not acceptable. You WILL need a lawyer to draft this document and get it right.

C-Mac
02-01-2007, 04:52 PM
Heh heh. That very well could be. The thought of going into business with a friend (and ruining a friendship) has definitely been one of my main worries. The good thing is that we both have other careers, so it's not a life/death thing. We figure that we may even lose money on our first project.

Then basically it comes down to the value of investment before and after. Just be sure of all the intagibles that surround the investment property, like the neighborhood, are many houses up for sale around it, whats it close to, just basic selling points that people are concerned with when buying a house. Your in a prime area no doubt here in NWA, but there are still some risky areas.

HonestChieffan
02-01-2007, 04:53 PM
Do you know where you plan to do this, is it a neighborhood wiith turnover and is it an area of increasing base values before the house is fixed up

Do you have a price point to start...like 120,000 and up or in that neighborhood

Can you afford a slow down and have to make payments for 6 months?

Simplex3
02-01-2007, 04:53 PM
an LLC in different then an S-corp.... there are C- Corps, S-Corps, and LLC.... LLC is the best because you are not personally liable for anything
Try and keep up, young man. I've been doing this for over a decade. :)

You file within your state as an LLC. The feds don't recognize LLCs, so you're either going to tell them you're a partnership or a corporation of some type.

NewChief
02-01-2007, 04:53 PM
The feds don't recognize LLCs for tax purposes. The reason you go LLC is all the benefits of a partnership (no SEC filings, no officers etc in KS, check a local lawyer to be sure) without any personal liability. Why an S-Corp to the feds? Glad you asked.

As an S-Corp you can distribute half your profits as salary and half as disbursements. This is important because you pay the full-ride 15% for Socialist Insecurity on the salary part. You don't have to pay the match on the disbursements, though, so that only costs 7.5% in SS taxes, saving you 25% on one of your biggest taxes.

The big key here for you guys is going to be the Operating Agreement. I can't stress this enough. The Operating Agreement will spell out in contract form what you can and can't do, if you need the other member's permission or if either of you can do "it" alone, what happens if one of you leaves, or gets an extended illness, or dies. It will also spell out things like whether or not you can take a loan out or otherwise encumber your ownership percentage. There are literally hundreds of things you're going to need to think about here, and since it's a contract between two individuals your state is going to have some guidelines of things that are and are not acceptable. You WILL need a lawyer to draft this document and get it right.

Thanks once again, Simplex. The good news is now that I might be a small business owner, I may be coming over to your "side" before long. ;)

C-Mac
02-01-2007, 04:54 PM
Close. Thanks Simplex. Your ideas on anorexia may suck, but you know your shit when it comes to business (and tax loopholes) ;)
Yes incorporate, its more of a pain but mucho protection.

Simplex3
02-01-2007, 04:54 PM
Thanks once again, Simplex. The good news is now that I might be a small business owner, I may be coming over to your "side" before long. ;)
My side rules. You should have been here long ago. We'll have you loving anorexics in no time.

recxjake
02-01-2007, 04:55 PM
Try and keep up, young man. I've been doing this for over a decade. :)

You file within your state as an LLC. The feds don't recognize LLCs, so you're either going to tell them you're a partnership or a corporation of some type.

ahh i see thank you... I'm taking entrepreneurship classes at Iowa.... they tend to be pretty basic

Simplex3
02-01-2007, 04:55 PM
Yes incorporate, its more of a pain but mucho protection.
Actually, in most states the LLC paperwork is one page. You'll need your federal tax id first, but you can do that with a 1-800 number now.

Simplex3
02-01-2007, 04:56 PM
Also bear in mind that if you're going to operate over state lines you'll want to file as a foreign entity in that state so that you can protect your company name.

Simplex3
02-01-2007, 04:57 PM
http://www.sosweb.state.ar.us/business_entity_fees_forms_pro.html

recxjake
02-01-2007, 04:57 PM
Iowa has no state corporate tax... just fyi

HonestChieffan
02-01-2007, 04:57 PM
Business organization is way to much work for a small business like this...you stand to make a bit from your effort not enough to do all that just get liabilty insurace and move on

Simplex3
02-01-2007, 04:58 PM
$45 to file your LLC online, baby. You want Form LL-01.

Simplex3
02-01-2007, 04:58 PM
Business organization is way to much work for a small business like this...you stand to make a bit from your effort not enough to do all that just get liabilty insurace and move on
$45 and a few forms is way cheaper than liability insurance.

Simplex3
02-01-2007, 04:59 PM
You'll also need to do an entity search before you fill out that form so that you can make sure your business name is clear:

http://www.sosweb.state.ar.us/corps/

Simplex3
02-01-2007, 05:02 PM
Applying for your FEIN:

http://www.irs.gov/businesses/small/article/0,,id=97860,00.html

Simplex3
02-01-2007, 05:03 PM
Seriously though, do talk to a lawyer. I know we all hate paying those bloodsuckers, but this is one case where a couple hundred to them can save a friendship and save your a** if you get sued.

Donger
02-01-2007, 05:04 PM
I don't think you should listen to Simplex3. He doesn't appear to be much of a businessman. He's giving all this away for free.

Simplex3
02-01-2007, 05:06 PM
I don't think you should listen to Simplex3. He doesn't appear to be much of a businessman. He's giving all this away for free.
I'll be raping him on the details I'm not providing, Exxon style.

Donger
02-01-2007, 05:06 PM
I'll be raping him on the details I'm not providing, Exxon style.

Atta boy.

C-Mac
02-01-2007, 05:14 PM
Actually, in most states the LLC paperwork is one page. You'll need your federal tax id first, but you can do that with a 1-800 number now.

I'm talking about the yearly bookwork, not the initial filing.

Simplex3
02-01-2007, 05:17 PM
I'm talking about the yearly bookwork, not the initial filing.
That too. The annual report for most LLCs is one page. They have a form for it and everything.

ferrarispider95
02-01-2007, 05:34 PM
$45 to file your LLC online, baby. You want Form LL-01.

Thats cheap, $500 to file in Kansas.

C-Mac
02-01-2007, 05:34 PM
That too. The annual report for most LLCs is one page. They have a form for it and everything.

So your suggesting that the paperwork and effort involved is less with an incorporation that with a proprietorship?

NewChief
02-01-2007, 06:03 PM
BTW,

We just finished dinner. I'm still reading this. Thanks a ton guys. And daaamn. I knew it wouldn't be long before Donger chimed in. For some reason, Simplex and Donger are like twins in my mind. I don't know why, but the two just seem to go together like peanut butter and jelly. BTW, Donger... when Simplex's advice leads me astray, I'll be sure to consult you about suing him for culpability. I'll pay you, though.

Seriously, guys. Thanks a ton. You've given me a bunch to mull over for the next few days. I knew the Planet wouldn't let me down.

chief2000
02-01-2007, 06:40 PM
I heard alot of the flippers got toasted when rates went back up.

I don't think you'll find alot of good deals. Good luck though

Simplex3
02-01-2007, 06:51 PM
So your suggesting that the paperwork and effort involved is less with an incorporation that with a proprietorship?
There will be far more paperwork in the insurance forms than there will be in the single page annual report form for an LLC. And LLC is basically the paperwork of a sole proprietorship/partnership with all the personal protection of a corporation. They rock.

My wife and I own an LLC which owns stakes in any number of LLCs at any given time. I don't do any more paperwork now than I did before I incorporated (a decade ago?) and I sure as hell save a lot of money.

PS, NewChief:

http://www.borednet.com/th_img/629.jpg
"I'll sue your friggin' asses. You think I'm kidding? Just as the sock puppet, man."

Simplex3
02-01-2007, 06:54 PM
For some reason, Simplex and Donger are like twins in my mind. I don't know why, but the two just seem to go together like peanut butter and jelly.
I'm the peanut butter though, right? I always kind of pictured Donger as a fruit.

SBK
02-01-2007, 07:00 PM
I've been doing this fix and flip stuff for several years. Study every book you can find, if you'd like to know a few good ones pm me, and make sure that no matter what else you do you buy the house right. The top 10% is gone in closing costs, so make sure you have at least 10% plus the % of profits that you want. I never bought a house that I'd be in over 80% after I repaired it, I preferred 70%-75% of the value to be what I was in it at.

ChiefsLV
02-01-2007, 07:21 PM
You might want to catch up on any missed episodes of Flip That House...

http://tlc.discovery.com/fansites/flipthathouse/flipthathouse.html

Halfcan
02-01-2007, 07:48 PM
I am not sure why you need to start a Corporation to flip one house? Lawyer cost alone will eat into your profits.

Halfcan
02-01-2007, 07:49 PM
You don't need a lawyer to fill out incorporation paperwork anyhow.

Halfcan
02-01-2007, 07:52 PM
Put both of your names on the sales contract, the less you get the State involved the better.

Simplex3
02-01-2007, 07:53 PM
You don't need a lawyer to fill out incorporation paperwork anyhow.
No, but you will to draft a proper Operating Agreement.

SBK
02-06-2007, 11:05 PM
You don't need a lawyer to fill out incorporation paperwork anyhow.

Saving $100 before you start often leads to you losing way more than that down the road. Get the attorney and do it right.

Halfcan
02-06-2007, 11:11 PM
Saving $100 before you start often leads to you losing way more than that down the road. Get the attorney and do it right.

If you use a great Realtor to help you locate then flip the property-the partnership will be covered in the sales contract. It is better than anything a lawyer can draw up. Not only can the agent save you money when buying and negoitiating the deal-they can market the finished profit to maximize the investment.

Halfcan
02-06-2007, 11:12 PM
What lawyer works for $100 anyway?

SBK
02-07-2007, 02:23 AM
If you use a great Realtor to help you locate then flip the property-the partnership will be covered in the sales contract. It is better than anything a lawyer can draw up. Not only can the agent save you money when buying and negoitiating the deal-they can market the finished profit to maximize the investment.

Realtors--99% couldn't find you a deal if you stuck it to their forehead, that 1% of good realtors is worth their weight in gold.

I can tell that you've never been in business before. Real estate is lawsuit happy--realtors don't represent you, or protect you from litigation. Realtors get in the way and try to collect the crumbs from the transaction.

And lots of attorneys work for $100--for them to draw up LLC docs they have their secretary enter some info and hit print. If you're going to be working with them--or have worked with them in the past this shouldn't be a problem.

I learned this the hard way, I got involved in a transaction with some frauds, realized what they were doing and walked away from over $2,000,000 that I would have had in less than one month. It sucked cause I lost a ton of money too, but once I realized they were breaking the law it was an easy decision to make. Good thing I did, the FBI commended me and the district attorney was surprised that I walked away. If I had cleared everything through my attorney and not just trusted these people's word I would have avoided a pretty hairy situation.

So don't ever make this mistake, especially when dealing with something as expensive as real estate. Pay the attorney the small fee up front and avoid the big one down the road.

trndobrd
02-07-2007, 04:51 AM
Simplex is correct on the operating agreements, have the lawyer do it. You can save time and money by figuring out what you want to do before talking to the lawyer.

Nothing used to make my heart smile like sitting down with a couple soon-to-be business partners and throwing out questions like "how often do you want to disperse profits" and watching the clock tick away at $140 an hour as they sat in my office discussing this stuff for the first time.

1) How much can a single partner spend without permission of the other? It needs to be practical (enough to buy a can of paint) but not put you in financial jepoardy (purchase of another house).

2) Who decides who gets what, how much and when. How much of the profit will be held back for the next project? Do you want to make adjustments if one of you puts in considerably more time on a project? If it is by decision of 100% of the partners, realize he can jam you up by not agreeing to disperse revenues.

3) What happens when one of you gets tired of flipping houses? Can you sell out to a third party? Do you need permission of the other partner to sell out? Does the other partner have right of first refusal?

4) If one of partners dies, what do you want to have happen? Does the deceased partner's family get full voting rights and do you want your partner's wife down at the jobsite asking why you are spending so much on nails?

5) If your partner doesn't want to spend all that extra money on liability insurance are you going to be holding the bag? Might want to add that in the agreeement somewhere (state laws vary, ask your lawyer).

6) Your partners has all the tools, will he be required to allow the corporation to use these tools? Vehicles?

As a general rule, everyone is happy when the business is making money, the original partners like each other, and it's new and exciting. That's not what the operating agreement is for. The operating agreement is for times when things don't go right, there is a loss or disagreement. It spells out rights and responsibilities. Your lawyer can set it up most anyway you like, you just need to think it through before hand.

Simplex3
02-07-2007, 07:55 AM
1) How much can a single partner spend without permission of the other? It needs to be practical (enough to buy a can of paint) but not put you in financial jepoardy (purchase of another house).
This one is harder than it sounds to decide on.
2) Who decides who gets what, how much and when. How much of the profit will be held back for the next project? Do you want to make adjustments if one of you puts in considerably more time on a project? If it is by decision of 100% of the partners, realize he can jam you up by not agreeing to disperse revenues.
The 100% required in a 50/50 deal bit is hard. It's why I generally include what my lawyer calls a "Mexican Standoff" clause. Basically once a year my partner and I would decide on a fair minimum value for the company. At any time either of us can offer to buy the other one out for at least the fair minimum value, and when that happens it triggers a timer. The other partner has x amount of time to either sell at the offered price or BUY at the offered price. Once the event is triggered, somebody is leaving, end of story.

If you offer just the fair minimum value, odds are your partner will turn it on you and you're gone. If you offer too much, your partner will make out like a bandit and be glad to be gone. It's a variable and generally fair way to handle it. Be sure to make the timer 90 days or as long as you think it will take you to liquefy and/or get a loan in case your partner surprises you one day.
3) What happens when one of you gets tired of flipping houses? Can you sell out to a third party? Do you need permission of the other partner to sell out? Does the other partner have right of first refusal?
You want right of first refusal and you want to have the right to deny the sale to specific parties so he doesn't sell to his retarded cousin. You do NOT want to limit his ability to sell his shares to a trust for his kids, etc. so long as that entity is 90% controlled by him and must stay that way.
4) If one of partners dies, what do you want to have happen? Does the deceased partner's family get full voting rights and do you want your partner's wife down at the jobsite asking why you are spending so much on nails?
I generally set this up so either partner can will his ownership to anyone they want but it's up to the surviving partners to decide if that person gets voting rights or not. Be sure to also cover insanity, inability to work, etc.
As a general rule, everyone is happy when the business is making money, the original partners like each other, and it's new and exciting. That's not what the operating agreement is for. The operating agreement is for times when things don't go right, there is a loss or disagreement. It spells out rights and responsibilities. Your lawyer can set it up most anyway you like, you just need to think it through before hand.
Also, a very solid post by trndobrd. :clap:

As an ex-boss of mine once said to me, contracts are there so that friends will stay friends.

trndobrd
02-07-2007, 09:36 AM
This one is harder than it sounds to decide on.

The 100% required in a 50/50 deal bit is hard. It's why I generally include what my lawyer calls a "Mexican Standoff" clause. Basically once a year my partner and I would decide on a fair minimum value for the company. At any time either of us can offer to buy the other one out for at least the fair minimum value, and when that happens it triggers a timer. The other partner has x amount of time to either sell at the offered price or BUY at the offered price. Once the event is triggered, somebody is leaving, end of story.





Their planned house flipping business would be quite a bit easier to manage than your businesses since they should only have one house working per summer, then the primary asset, the house, is liquified. After each sale the fair market value would basically be cash on hand, plus a few odds and ends like excess materials, old paint brushes and the company name. Shouldn't be hard to figure a way to allow either party to take his ball and go home after closing on a house, and before the purchase of the next one.

elvomito
02-22-2007, 02:32 PM
anyone interested in real estate would probably benefit from this: http://www.myeducationnetwork.com/learn_to_be_rich/MO/kansas_city/183/

i've read several of this guy's books and he's very good