Do You Need An LLC To Wholesale Real Estate? [2024 UPDATE]Sep 28, 2023
Real estate wholesaling is an investment strategy that offers beginners an opportunity to enter the real estate realm with minimal investment capital requirements. The art of wholesaling resembles its sister strategy known as flipping houses. Each investment strategy requires similar due diligence, with wholesaling offering a faster and easier path to closing.
A real estate wholesaler targets properties that are typically priced below market value, usually because highly motivated sellers need to move distressed properties quickly. If done correctly, real estate investors can wholesale real estate without a real estate license, real estate broker, or real estate agent.
Wholesale deals can be done with an owner-occupied or rental property, a multi-family property, or distressed properties, like a foreclosure.
Wholesalers enter a real estate contract with a seller, receiving equitable interest through the Principle of Equitable Conversion. But before closing on the initial purchase contract, the wholesaler assigns their' right to purchase' to another end buyer. As a result, the only required capital would be funding for the earnest money deposit.
The wholesaler uses an assignment of sale–the legal instrument that allows 'contracted buyers' to transfer their equitable interest to another buyer. The real estate wholesaler's gross profit is the pricing differential (between the initial and second purchase agreement).
Now, this begs the question, "Do you need an LLC to wholesale real estate?"
Wholesaling real estate is like any other for-profit business with an objective to turn a profit. Like any business or organization, wholesalers can select from a number of business entities. The available business entity options have not changed in 2024.
Wholesale real estate business structures are discussed below, including the use of a Limited Liability Company (a.k.a., LLC), a type of entity that a real estate wholesaler can establish under state statute.
- Do You Need An LLC To Wholesale Real Estate?
- Wholesale Real Estate Business Structure Options
- How Is A Wholesale Real Estate LLC Taxed?
- Pros & Cons Of An LLC For Wholesaling Real Estate
- How To Start A Real Estate LLC In 7 Steps
- How To Use An LLC For Wholesaling Real Estate
- Wholesale Real Estate LLC FAQs
- Final Thoughts: Can You Wholesale Real Estate Without An LLC?
*Before we begin our guide on wholesale real estate LLCs, we invite you to view our video on How To Wholesale Real Estate Step by Step (IN 21 DAYS OR LESS)! Host and CEO of Real Estate Skills, Alex Martinez, provides a comprehensive, step-by-step guide for beginners to start wholesaling real estate!
Do You Need An LLC To Wholesale Real Estate?
No, an LLC is not a requirement for wholesaling real estate.
However, it can be a wise business choice. While it's legal to wholesale without one, forming an LLC can offer valuable financial and legal protections.
Operating under an LLC can provide tax benefits, access to business loans, and enhance your professional image in the real estate industry, especially in locations like California where these advantages are particularly beneficial.
Now, to better understand wholesale real estate business structures, let's discuss the options available to you below.
5 Wholesale Real Estate Business Structure Options
In its simplest terms, business entities are organization types created by one or more individuals for the specified purpose of engaging in a trade, conducting business, or similar activities.
A business entity decision has important legal and financial implications, and the benefits and concerns for each are discussed below. These are the essential considerations when deciding how to structure your wholesale real estate business:
- Sole Proprietorship
- Corporation (C Corp)
- S Corporation (S Corp)
- Limited Liability Corporation (LLC)
A sole proprietor is the simplest to establish and manage. It is defined by an individual or a married couple – acting as an owner & business operator. According to legal statutes, a business's sole owner is, by default, a sole proprietorship. Sole proprietors are not mandated to register with the state; however, they may need to meet licensing or permit requirements.
The most salient points regarding this entity are–
- The sole owner of the wholesale real estate company is personally liable for the company's debts & liabilities.
- It is more difficult to obtain business financing and build business credit if the wholesale business is not registered.
- Consultants and freelancers tend to work as sole proprietors.
A partnership defines the legal relationship between two or more people who work together in trade or business. A general partnership is the default entity for multiple business owners and needs state registration.
Each partner contributes money, labor, or skill to a partnership, and each share in the profits and/or losses.
A partnership is not allowed to be any of the following:
The partnership is required to file an annual tax return to report income, deductions, gains, and losses generated from its operations. A partnership passes its profits and losses to its partners and members, who report it on their personal returns.
Corporation (C Corp)
A corporation (C Corp) is an independent legal entity. It operates independently from its owners – a.k.a., shareholders. The corporation eliminates the owner's personal liability from the business debts and decisions. The corporation's officers and directors manage the company, although it is noted that only one person may perform each of these functions. So, one individual can create and control the entire incorporated business.
Corporations are ideal for larger businesses due to their expenses and laws that are to be followed. Each state sets forth its rules, forms, and fees for corporations. Corporations are great investment vehicles for venture capitalists or potential investors because they offer wider ownership.
S Corporation (S Corp)
An S Corporation is part of the tax code added by Congress in the late 1950s to encourage family and other small businesses. This is because subchapter S avoids double taxation experienced by C corporations.
The S Corp offers limited liability protection (like the C Corp) but acts as a pass-through entity because S Corps have no corporate tax obligations.
Limited Liability Corporation (LLC)
An LLC is among the more popular legal entities. LLCs are formed at the state level, meaning the rules governing an LLC differ among states. An LLC is a great fit for startups and smaller companies.
LLCs offer an easy setup and a simple business structure. Creating and operating an LLC is generally less expensive than other C corporations with regard to compliance requirements.
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How Is A Wholesale Real Estate LLC Taxed?
LLCs offer protection from personal liability. For the most part, the debts and assets are owned by the LLC, not the owners. The LLC has no federal income tax obligation. The profit and loss simply pass through to the members and owners, who report it as personal income. LLCs have these tax filing options-
- As a Single-member LLC, one can file as a sole proprietor.
- Multi-member LLCs can file as a partnership.
- Any LLC has the option to file as a C or S corporation.
The selected business entity will directly impact the company's tax obligations and the ability of the company to borrow or raise capital. However, the main aspect to consider is how to protect yourself from potential lawsuits created by the business.
For more information on tax filing requirements in each state, we invite you to review Nolo's State Guide to LLC Report & Tax Filing Requirements.
Pros & Cons Of An LLC For Wholesaling Real Estate
As noted above, a Limited Liability Company (LLC) is a business entity that protects its owner's assets by offering a limited liability but with the simplicity provided by a sole proprietorship or partnership (i.e., the lack of legal, recordkeeping, & tax formalities & maintenance requirements).
Forming an LLC also opens the owner's ability to open a commercial bank account, obtain necessary permits or licenses, and enter a legally enforceable contract of sale – without risk of personal liability.
Advantages Of LLCs When Wholesaling Real Estate
One of the essential benefits of an LLC is the liability protection it offers its owners regarding their personal property. If the LLC, as a business, faces a lawsuit or creditors refuse to pay, business assets may be lost; however, the owners' property (i.e., car, home, savings & other assets) are protected.
In addition, a Limited Liability Company's tax structure allows a real estate wholesaler to avoid the double taxation typically found in corporate entities.
Instead of paying corporate taxes, the profits generated from the wholesale business, as an LLC, pass through to its owner(s). This saves on the expense of professional accountancy services required to file separate, more complex tax returns.
LLCs also help create a real estate wholesaler's professional image for future clients.
Disadvantages Of An LLC When Wholesaling Real Estate
- Forming a Limited Liability Corporation is far less complex than the requirements of a corporate creation but still requires paperwork and fees. As a state-created business entity, an LLC may need to pay annual fees, depending on the LLC's domicile state.
- With intentions of financing future operations through a lender, LLCs should be aware that an LLC may have to agree to a higher rate of interest than other business entities.
- To wholesale real estate in a state other than the LLC's domicile state, the LLC must be registered in that state as well.
- If the Limited Liability Company (LLC) has two or more members or owners, the LLC must get an Employer Identification Number (EIN) issued by the Internal Revenue Service -even if the LLC has no employees. A one-member LLC with employees will also need to obtain an EIN available at IRS.gov. Additionally, if the LLC wishes to be taxed as a corporate entity (rather than a sole proprietorship), it must obtain an EIN.
- The type of business and the exact location will dictate if the Limited Liability Corporation needs to obtain a state/local business license. Complete your due diligence by checking with the state agency to ensure your real estate wholesaling business operates lawfully, with the required registration, if applicable.
- If an LLC collects sales tax or has employees, it will need to appropriately register with the domicile state's taxing authority.
How To Start A Real Estate LLC In 7 Steps
Forming a real estate LLC is a strategic move for investors seeking protection and flexibility in their real estate ventures. In this guide, we'll walk you through 7 essential steps to establish your own real estate LLC successfully:
- Choose A Name For Your LLC
- File Articles Of Organization
- Select A Registered Agent
- Decide Who Will Manage The LLC
- Create An LLC Operating Agreement
- Comply With Regulatory Tax Mandates, & Regulations
- File Annual Reports
1. Choose A Name For Your LLC
First, select a name for an LLC in accordance with state rules. Each state's LLC regulations may differ, but most require –
- The business name ends with the Limited Liability Company designation or the LLC acronym.
- The selected name for the real estate wholesaling business cannot be the same as any other business entity (LLC or otherwise) that exists in the state in which you are registering the LLC.
Certain states may offer, for a fee, the option to reserve your chosen LLC for a short time, prior to the time the LLC files the Articles of Organization.
Examples Of Wholesale Real Estate LLC Names
A wholesaler's brand offers the first impression that you want to relay to potential buyers and motivated sellers. Be sure not to pigeonhole your company and efforts by selecting too narrow a name.
Wholesale real estate LLC names may reflect your location, like Beacon Wholesaling, LLC.
Consider these important suggestions when considering a name for your Real Estate Wholesale business –
- Check the domain name availability with your local Secretary of State as you consider wholesale company names. Simply conduct a business name lookup.
- Say the name aloud. Is it easy to pronounce?
Which rolls off the tongue easier?
- Apogee Wholesaling LLC
- Landmark Wholesaling LLC
Although debatable, many professional marketers suggest a simple, short name – think Google or Apple. The general rule is to keep it to a maximum of three words (and ten syllables) to avoid branding issues.
- Capstone Wholesaling LLC
- Summit Wholesalers LLC
- Zenith Wholesalers LLC
- Happy Homebuyers LLC
Use alliterations or terms found in nature.
- Haven Wholesaling LLC
- Granite Wholesaling LLC
- Big Rock Homes LLC
- Swell West Homes LLC
2. File Articles Of Organization
The formal creation of an LLC includes the filing of Articles of Organization. This is filed with the domicile state's corporate filing office, the Secretary of State more often than not.
A few states, like Washington, Delaware, New Jersey, Mississippi, and New Hampshire, refer to this document as a 'Certification of Formations.’ The Commonwealths of Pennsylvania and Massachusetts refer to this legal document as a 'Certificate of Organization.'
Often, articles of organization can be submitted online at the Secretary of State's website in your domicile state. To complete this filing, you will need the following –
- The chosen Limited Liability Company name
- The name & the address of the LLC's Registered Agent
- The names of the owners/members
- The name(s) of those managing the LLC
3. Select A Registered Agent
Limited Liability Companies (LLCs) must have a Registered Agent (RA). The responsible party or RA can be an individual or company that agrees to accept the legal paper service on behalf of the LLC. The Registered Agent is required to have a physical street address in the domicile state in which the LLC is registered. An owner or member of the LLC may act as a registered agent. Most states maintain an ongoing list of private companies, aka commercial registered agents, that will act as registered agents for a fee.
4. Decide Who Will Manage The LLC
As one would expect, most small LLCs are managed by an LLC member. However, the company can appoint one (or more) non-members to manage the Limited Liability Company. These non-members would be like a Board of Directors who are responsible for corporate oversight.
Managers are the point people who are tasked with managing the business's financing, strategic planning, or the purchase of real estate, among others.
5. Create An LLC Operating Agreement
Most states do not require the creation of an operating agreement; however, it is a good idea.
An operating agreement acts as an internal memo that establishes how the LLC runs. If the LLC has no operating agreement, state law dictates the LLC's operations.
6. Comply With Regulatory Tax Mandates, & Regulations
Additional regulatory & tax requirements may apply to your LLC. It is best to consult with a tax specialist or accountant.
7. File Annual Reports
Each state dictates the rules for whether an annual report must be filed – with a fee of as much as $750 each year. This LLC Tax and Annual Filings Requirements: 50 State Guide offers quick access to state requirements.
Thinking about investing in real estate? Join Alex Martinez at his FREE training to learn how to get started with house flipping and wholesaling!
How To Use An LLC For Wholesaling Real Estate
As noted above, after coming to agreed-upon terms with the seller, a real estate wholesaler enters a purchase & sale agreement with a seller. This fully executed contract (and the provision of an earnest money deposit) is the legal document that triggers a change in ownership dictated by the Principle of Equitable Conversion.
At this time, the buyer receives equitable interest, while the seller converts their interest to personal property until closing.
The purchase contract sets forth the terms of the deal and offers the buyer the opportunity –
- To buy the investment property at the agreed-upon terms, or
- Assign their right to purchase to another end buyer, usually a cash buyer.
But note, that while contracts generally allow for assignments (by default), homeowners or their representatives may modify the terms. Some contracts prohibit assignments or require that the seller or property owner approve the assignment. These are important terms for wholesalers, which can be changed through a mutual agreement by both sides of the transaction.
*Want to learn the proven strategies for finding cash buyers? View our video below where Alex Martinez covers How To Find Cash Buyers For Wholesale Deals! [FREE & ONLINE]!
Using An LLC To Enter The Contract
Forming an LLC is a strategic way to avoid situations where assignments are not allowed or conditioned heavily contractually. Savvy wholesalers can enter a contract with a seller as the LLC-buyer and provide a deposit to be held in escrow.
When another buyer is selected, instead of assigning their equitable rights, the real estate wholesaler can simply transfer the ownership of the LLC to the buyer for a fee. In this regard, the original contract never needs modifying because the buyer didn't change. The only change was the LLC's ownership.
To be transparent, the seller should understand your intentions; however, the real estate transaction will likely proceed to close uninterrupted after this disclosure.
Double Closing A Wholesale Real Estate Transaction With An LLC
The double closing offers another technique to close for a real estate wholesaler operating as an LLC. As its name suggests, the double close is two closings – typically back-to-back, in which the wholesaler is the buyer in the first deal and the seller in the second transaction. One drawback of the double close is dual closing costs, including the filing and title company fees.
When a double close is done with an LLC, the wholesaler may complete the home buying purchase with the original seller and then sell the LLC to the final buyer after closing.
Wholesale Real Estate LLC FAQs
Curious about using an LLC (Limited Liability Company) for your wholesale real estate ventures? Below, we'll address common questions and provide insights into how forming an LLC can benefit your wholesale real estate business.
How Much Does It Cost To Set Up An LLC?
There is usually a nominal filing fee required when submitting the LLC's articles of organization. These fees vary by state, and on average, one can expect the fee to be around $100.
We invite you to visit TRUiC for the specific requirements for forming an LLC in your state!
What Is The Best Entity For Wholesaling Real Estate?
The entity that will best support a real estate wholesale business is contingent on the business goals and size. Initially, an LLC may be the best choice before the wholesale business begins to turn a significant profit – somewhere around $50,000/year.
Once the LLC hits a certain income/profit level, it may make financial and legal sense to convert to an S Corporation. However, each real estate wholesaler must determine which entity would serve them best by consulting with a real estate attorney or accountant professional.
Final Thoughts: Can You Wholesale Real Estate Without An LLC?
In conclusion, do you need an LLC to wholesale real estate?
Wholesalers are certainly able to wholesale real estate without using a Limited Liability Company (LLC). With the many options available, from extremely simple to advanced corporate structure, the best option for you should be considered with your professional tax and legal advisors.
Successful wholesalers often choose an LLC, as it provides valuable flexibility. It protects the wholesaler's interests in the deal and provides more opportunities to wholesale multiple wholesale properties simultaneously.
Forming an LLC will help increase your real estate investing and wholesaling opportunities plus – likely improve your return on investment.
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