Private lending to an LLC (Legalities?)

6 Replies

My attorney is being a bit slow to respond as to the legal framework, so I figured I'd reach out to BP and get some input.

I want to set up a series of private mortgages between one LLC and another LLC. LLC #1 will lend to #2 via secured collateral/properties at specified rates.

My primary concern is the legality behind this, and what kind of contracts/paperwork would need to be set up between the two. Filing a mortgage lien against a property in the county of location is easy enough, however i need to know what I may be missing in the process. 

Originally posted by @Charlie Fitzgerald :

I would not do it LLC to LLC...although many, many investors do. I would have an S Corp own the LLC's...wait for your Attorney to structure this with you...if they can't or are unsure, find one that isn't.

 Is there a specific reason for this? 

Originally posted bydon Schlichter:
Originally posted by @Charlie Fitzgerald:

I would not do it LLC to LLC...although many, many investors do. I would have an S Corp own the LLC's...wait for your Attorney to structure this with you...if they can't or are unsure, find one that isn't.

 Is there a specific reason for this? 

To me it seems like he's attempting (or wishing) to lend money to his business and have his business pay back the investment with interest. The tax implications here at big, as you ultimately flow the profits (and losses) from each entity straight to your personal tax return with an LLC. I'm not a CPA, maybe @Brandon Hall can weigh in, but if you're wanting to grow capital for future lending, creating a S corp, seems like the way to go here. 

@Matt Motil thanks for tagging me here.

@Brandon Schlichter there are no tax issues here. LLCs are pass through entities so your interest income from LLC A will be offset by interest expense from LLC B and net out to $0.

The problem as I see it is two-fold. (1) Intra-entity loans come with administrative burdens and costs. Specifically, the loan will need to be substantiated by an official loan agreement. You will need to charge an arm's length interest rate and you will need to have an amortization table ready to go; and (2) if you ever want your LLCs to receive financing in the future, the loans will create issues. 

what do you expect to gain from this?