@Brian Burke gave a great answer about taxes. Here’s the other part by way of a few examples.
To avoid usury, the loan must be originated by a CA licensed real estate broker (and be secured by real estate). That’s it. Period. Neither a CFL nor anyone else gets a usury exemption. Both a broker and CFL are allowed to advertise. CFL’s do not originate loans as part of their license, but it wouldn't matter since they don't get the usury exemption. If you have a CFLL, you must also use a broker for your originations.
One other difference is that a company can become licensed as a CFL instead of a natural person.
Here’s a one business structure:
1. Lupe’s Lending is a California S-Corp that is licensed as a CFL.
(Note: @Lupe Santiago is not licensed. Her S-Corp, for which she is the president, is licensed)
2. Because it is licensed as a CFL, Lupe’s Lending can now advertise that they are in the lending business.
3. Lupe hires Bart Broke, a CA licensed real estate broker. Bart originates all the loans for Lupeâs Lending and receives $500 per origination paid by the borrower at the close of escrow. All notes and DOTâs are written in the name of âLupeâs Lending.â These were previously reviewed or obtain thru a licensed CA attorney with a specialty in lending.
As loans are paid off, Lupe pays herself a salary and a dividend. She will pay payroll tax on her salary but none on her dividends. Plus she will make tax deferred contributions to her 401k plan that also lends money in its name, originated by Bart.
1) Lupe Santiago is completely unlicensed and does business in Santa Rosa, CA under the name “Lupe Santiago, a California S-Corporation”
2) She meets Sam Saint, a CA Licensed Real estate Broker at a REI club.
3) Lupe also meets Brian Burke, a local and very experienced flipper, who always needs reliable money for his flips and who operates âBrian Burke, a California LLCâ.
4) Lupe checks Brian out backward and forward, likes and trusts him, and views a few of his properties under contract. She agrees to loan âBrian Burke, a California LLCâ money on one of these and they agree to the terms.
5) Lupe either purchases her documents from a well-regarded lending attorney, or has the attorney review Sam’s documents.
6) Sam contacts escrow and originates the loan in the name of âSam Saintâ using money that Lupe wired to title. Part of Samâs paperwork is an assignment agreement that transfers the Note and DOT to âLupe Santiago, a California S-Corporationâ at the close of escrow. This document gets recorded.
7) Sam receives a flat fee of $500 for the origination, paid by Brian at the close of escrow. Brian now owns the house and Lupeâs corporation has been assigned a Note and DOT secured by Brianâs property.
8) If she wanted, Lupe could sell her note or use it as the collateral against a personal loan. She could then loan that money out and repeat the process over and over and over.
As loans are paid off, Lupe pays herself a salary and … (same as above).
Notice, in the second example you need only a broker and you donât have to advertise because you met your borrower at an REI club. You could still obtain the CFLL for your S-Corp and advertise if you wanted. Frankly, unless you have an enormous amount of your personal money, you donât need too many active flippers.
Also, to answer Brianâs question, the Dept. of Corporations recognizes everything (individuals, LLCâs, and corporations). The CA DRE only recognizes individuals and corporations. No one I know understands why?
This is not legal advice Lupe, so if you end up in the slammer because of it, the only thing I’ll promise is to send you a cake with a hacksaw baked in ;-).
Hope it helps. If not, feel free to PM me and I’ll send you my phone number so we can chat. This really took a long time to write.