Value in an LLC to buy notes for myself?

8 Replies

Hi all - I am interested in buying a notes for myself with my own money in order to hold them for cash flow.  I will likely start with first lien, performing notes.  Over time, I might tackle non-performing firsts or seconds.  I would use a servicer for the notes.

Should I form an LLC for this business? Is there any benefit to doing it through an LLC versus holding notes in my personal name?

Your monthly income (meaning the amount of money you receive from the note) will be the same whether you have an LLC or not. The LLC will require you to form the entity and then pay annual fees to maintain it and you have to file additional tax forms. If you go through the LLC, your income will likely be subject to self-employment taxes before it gets to your pocket. You should consult a tax professional but Im going to say skip the LLC.

An LLC protects you against any personal liabilities which is particularly important if you decide to purchase non-performing notes. While there is a tax implication it more than outweighs the risk of someone going after your personal assets in the event of a litigious borrower or their attorney. You can also reduce that risk by boarding the note with a licensed servicer but I can't stress enough how important it is to have an LLC.

We deal in performing notes and handle them a couple of ways. First, using a self-directed ROTH IRA, and second through our LLC. Both offer benefits and protection. I agree with Wayne in that you can't stress enough how important it is to protect your personal assets. Keep them as far away from the front line of any potential litigations as possible. But for real asset protection advice, seek a good business lawyer and tax accountant. Just be prepared to find that not all know nor understand exactly how notes work.

Thanks everyone. I figured the LLC would be valuable and this confirmed it!

An LLC is tops for mitigating personal liability, but in this scenario, you can "have your cake and eat it too" by electing said LLC to be taxed as an s-corp come tax time. Check into it.

Lawrence Rutkowski, Real Estate Agent

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