Over the years, I’ve owned as many as 20 properties that were actually held in my own personal name. I don’t recommend that. In the beginning, maybe you could purchase a property or two in your own name, but when you decide to continue with your investing, you should set up an LLC to become the owner of any future property.
When it comes to wholesaling though, you definitely want to set up an LLC. This keeps that activity separate from you for liability purposes, especially if you’re a real estate agent in a state that does not recognize net listings.
There are lots of other entity types. There are S-Corps, C-Corps, general partnerships, things like that. What I recommend at the end of the day, after all the studying we’ve done and all the experience we have, is that an LLC is simply the easiest, least expensive, fastest way to set up a separate entity to shield you from liability.
The reason behind this is, life isn’t perfect. Things sometimes don’t go the way you think they’re going to go. Let’s say you get involved with a wholesale transaction and down the road, the consumer files a complaint. If you executed the sale in your own name through what’s called a sole proprietorship, you would be held liable and your assets would be potentially at risk in a lawsuit. However, if you set up a limited liability corporation, LLC, you get some of the same benefits of being a sole proprietorship but you also get some of the benefits of being a corporation. One of those benefits happens to be a separation of liability, or liability protection. If you were involved in a wholesale transaction through your LLC and the consumer involved in that same transaction decided to file suit down the road, they would file suit against the LLC rather than you personally.
In another module, I’m going to actually diagram how the wholesale payments work. The bottom line is the easiest way is to set up a basic limited liability corporation which has what’s called pass-through income. It passes through to you and does show up on your personal income tax statement. In most states, you’ll have to file some type of return for the LLC at the state level, but it’s not required at the federal level since any income generated in the LLC is passed through to you personally. The other thing is that with an LLC, you’ll get a separate tax ID. It’s a nine-digit number just like your social security number but it’s separate and unique just for the LLC.
You need to think of an LLC in the eyes of the IRS as simply another entity. It’s like another person. They think of you as your own unique entity and they think of your LLC as its own unique entity. The bottom line is it all goes through your personal income tax statement. This is really important, by the way. If you’re a licensee and you’re going to be involved in wholesaling, you absolutely must set up an LLC. Let me describe a scenario for you. If you’re a licensee, please pay particular attention to this.
8 Wholesaling So Everybody Wins
You set up an LLC. You’re the single member or the owner of the LLC. You own 100% of it, all shares. However, that doesn’t mean you have to sign documents. What you can do is you can hire an admin person, somebody who has signing authority for the LLC. You can grant them that right in your LLC operating agreement. If you’re interested in learning more about LLCs, we do have a couple of recorded modules on the website, MyInvestmentServices.com, that go into more detail. I suggest you download and review them so that you do this correctly. Also as you know, we do have an attorney in our group who coaches people and consults with them on setting up their LLCs. So in this scenario, you’re a licensee and a wholesaler. You set up your LLC, and you hire another person.
It could literally be even a virtual assistant who you grant signing authority. In other words, they can sign documents on behalf of the LLC. In this case, you’re Party B. Remember there was Party A (seller), Party B (wholesaler), and Party C (buyer) in a wholesale transaction. When you execute the sales agreement, you’re not signing. The administrative person that you hired for your LLC signs the paperwork. They sign the documents for the LLC. When you draw up the purchase agreement to get Party A’s property under contract, in the field where we identify the buyer, you’re going to name the LLC. It’s going to say, “Gary Wilson’s LLC,” or, “American Dream LLC.” And then you have that other person sign the documents for that LLC. When they sign the document, they’ll write “Jane Doe, authorized signer for American Dream LLC.” You could potentially make them a member, the owner of 1% or one share perhaps. In that case, they would sign “Jane Doe, member American Dream LLC.” That’s another possibility.
At this point, you really need to be speaking to your attorney about your first LLC. They’ll tell you how to actually structure that. I hope this helps you with the first part of it though. The second part of it is this. If you’re licensed, you’re not going to be working as a licensee in this situation. You’re actually going to have another agent in the office act as your agent (so they actually will earn a small commission). They will be the one executing the paperwork, the basic sales agreement from the agency point of view. Now they’re creating the sales agreement.
They’re documenting it, filling in everything. Then your assistant is going to sign everything on behalf of the LLC. Then that agent who you have in your office doing this for you is going to present the paperwork in a sales agreement to the other party. Sometimes it’s in fact another agent. What you’ve essentially accomplished here is this. You’re not actually signing anything. You don’t actually put anything in your name at all. You’re not taking control of the property. You’re not putting it under contract. Your LLC is.
The reason this is important down the road is if something ever went awry, somebody could file suit. They could file a suit against the LLC, and they can certainly try to attach the brokerage company, but now they won’t have much success with that. Nonetheless, that’s what they sometimes do. That’s how you wholesale as a licensee.
Wholesaling So Everybody Wins 9
If you’re not a licensee, you’re automatically going to need an agent representing you. You’ll still need to have an LLC, and yes, you still need to have an admin person who has signing authority for you. A couple of things to keep in mind here. There’s a term called ‘dealer status.’ What we’ve seen is some states is that if you’re an investor and you’ve done five wholesale transactions in a year, they could require you to take on ‘dealer status.’ This means you’ll have to file tax returns differently. They might actually force you to file Schedule C. In other words, they would look at you as if you’re a business, like a corporation. You really have to be careful here. If you’re going to get into a lot of wholesaling, you absolutely need to set up an LLC right out of the gate. Don’t wait. You might forget about it, but the next thing you know, when you’ve done five or six wholesale deals; you may get an audit on your tax return. Check with your tax accountant or attorney when it comes to this stuff. I just want to make sure you’re aware of ‘dealer status’ and the ramifications.
Always remember when you’re wholesaling, use an LLC to conduct business for you in your name. If you sign anything, if you are in fact signing anything, always sign your name with a comma, and the word “member” after it, and the name of your LLC. It would say, “Gary Wilson, member, American Dream LLC.” Note: You can sign certain things for your LLC. You just don’t want to sign sales agreements. You might set up a checking account in the name of the LLC, and you’ll be an authorized signer for that checking account. In that case, you would sign the banking documents, “Gary Wilson, member, LLC,” but your admin person would sign the sales agreements for the LLC, not the banking. Whenever you sign anything, if you are in fact signing, just remember to put that comma, “member,” and the name of the LLC after that.
Some attorneys will say you just have to sign comma “member,” because somewhere in whatever it is you’re signing, the LLC will be named. In any case, just check with your attorney on that. In Module 4 we’ll talk about how to locate properties correctly when you’re looking to wholesale—how to locate the best deals, whether they’re flips or rentals, that you’ll then advertise to people who want to buy those contracts from you so that they can therefore buy the properties.
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