This is the first in a series of Back to School posts I am writing specifically for folks who are thinking about starting in Michigan real estate investing with a 100% focus on buying and flipping foreclosures in their Michigan cities.
Start with forming a company to buy and sell foreclosures. Either a LLC or S-Corporation.
It cost $50 for a LLC, $60 for an S-Corp to be formed in less than 24 hours in Michigan. And if you are going to buy and sell foreclosures you need the legal and accounting shield that a LLC / S-Corp will provide you. The process is ridiculously simple and if filling out forms makes you nervous, any decent CPA will do the work for you around $250. You can also use cheap and good websites like LegalZoom.com to get it done for you really fast.
Which legal structure is best for you?
Can't tell you that since I am not licensed to give accounting advice in Michigan but I can tell you what I have seen inside my coaching group and my own businesses. Almost 75% of all folks I know use LLC's as their preferred structure nowadays. Most real estate investors who have partners (friends, family members or whoever) mostly go for LLC's.
A LLC is either formed as a single member (one owner who is running the whole thing) or multiple members (think of members a partners) or manager-managed LLC where one member (meaning you) acts as the decision maker / CEO while the rest of the members in most cases are silent partners meaning that they are not actively involved in what house to buy, how to fix it, how to sell it. You do all that and typically play the bank, funding the deals and rehabbing of these homes.
The LLC is a simple, beautiful thing to form in Michigan (the form asks for name, address, your name and a signature) and you are done. S-Corp requires filing one more form (2557) with IRS to complete the transformation of a regular corporation into an S-Corporation.
Thing to remember: if you are spending more than 1 hour researching this on the Internet - you are wasting time. Go see a CPA if you don't have one. Tell them what you are thinking about doing and with whom you are thinking about doing. Decide. Form it and be done with it. If you know what way you want to go already, go to State of Michigan Corporations website, download the form, complete them and fax it over to State of Michigan or go to Legal Zoom or 10 other companies like Legal Zoom but get it done.
If you have partners in your LLC - please go to a lawyer and get an Operating Agreement done, signed and in your drawer before you do anything in the business. That is the right thing to do. Most people forget about this part.
This is what I see - somebody who is well intentioned in starting a business and then gets sidetracked as he spends three months researching what is best: S-Corp vs. LLC vs. this or that. It is a waste of time. You have no idea who big or what your business is going to look like in five years. If four years down the road, you feel the need to ether change the structure of your business; well you form another LLC or S-Corp and move with it. Unless you are planning to take your company public (?) contemplating this decision for weeks is crazy.
If you are doing it yourself, get an Employee Identification Number also IRS website. Think of this EIN number as the social security number for your LLC / Scorp. Go to IRS.gov and you can get it online in less than five minutes.
Finally if you intend to have rentals in your life too - form another LLC or S-Corp to manage that business for you separately. It will be much cleaner for you track your profits and your expenses instead of mixing all of them in a big pile.
