Rental Property Investor · St Joseph, MI · Member since 2015 · 302 posts · 106 votes
I have a co worker that want's to provide funds for my next house at a fixed interest rate. One thing he is contemplating is whether or not to lend to me as an individual or if he should establish an LLC to invest. The money he provides will go to my LLC and used for renovations on my next property. Any advice or tips on what others have done is helpful. I will of coarse be using my own attorney to draft contracts and record and liens.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
9y
It won't matter, @Nathan Waters . From a tax point of view, LLC's are pass-thru entities. That is, any interest income and all relevant expenses associated with your co-worker's loan will be reflected on his personal tax returns either way. The tax liability will be the same, so there is no good or bad reason to have the LLC from a tax perspective. Why endure the legal expense of setting up the LLC and perhaps pay an accountant to file the necessary tax returns each year?
Lender liability is also very low and the likelihood of needing the protection of an LLC is small. Who would sue him? You? For what reason? Depending upon how it's done in your state, better protection might be for him to use a licensed broker as the loan originator.
Unless your co-worker plans on doing many loans to many investors and advertising himself a "Lender," which could also require licensing in your state (but not necessarily an LLC anyway), there is no need for the LLC. His lawyer could tell him where that line is drawn. Since we are probably talking real money here, he should have his own lawyer to protect hs interests.
Lender · Newport Beach, CA · Member since 2013 · 264 posts · 97 votes
9y
@Nathan Waters If he's just lending to your LLC directly and not holding a trust deed on the property, he probably doesn't need to establish an LLC. Though I can't give legal advice, and you both should consult an attorney, I don't believe there's much of a liability if he's just lending your company money to receive a return against a promissory note.
However, if he's recording a 1st or 2nd Trust Deed (or equivalent) to secure his loan as a mortgage, then I would establish an LLC. In the worst case, if you violate any permitting laws or defraud contractors and he has to foreclose, then the liabilities on the property could be his. Therefore he'd want the barrier to the personal liability the LLC affords. It would shield his other personal holdings from a worst case scenario.
Of course, non of it is a worry if your rehab goes off smoothly. There's just the two distinctions on the most common means of lending.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
9y
It won't matter, @Nathan Waters . From a tax point of view, LLC's are pass-thru entities. That is, any interest income and all relevant expenses associated with your co-worker's loan will be reflected on his personal tax returns either way. The tax liability will be the same, so there is no good or bad reason to have the LLC from a tax perspective. Why endure the legal expense of setting up the LLC and perhaps pay an accountant to file the necessary tax returns each year?
Lender liability is also very low and the likelihood of needing the protection of an LLC is small. Who would sue him? You? For what reason? Depending upon how it's done in your state, better protection might be for him to use a licensed broker as the loan originator.
Unless your co-worker plans on doing many loans to many investors and advertising himself a "Lender," which could also require licensing in your state (but not necessarily an LLC anyway), there is no need for the LLC. His lawyer could tell him where that line is drawn. Since we are probably talking real money here, he should have his own lawyer to protect hs interests.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
9y
@Nathan Waters my suggestion is that it is totally up to him to create an LLC. If a lender was to refinance the lien, the important step is that the lien is property documented on the deed (not documenting it correctly will cause issues if you were to refinance). There are other rules to know when your friend starts lending money but from the LLC view it is optional and up to him. He can certainly just lend it under his name.
Rental Property Investor · St Joseph, MI · Member since 2015 · 302 posts · 106 votes
9y
Thanks for all the input. I don't anticipate that there will be more than one loan per year at his point. That could change in the future. I appreciate the insight from everyone here.