LLC, Business Trust or ROTH Solo 401K: Which for New Note Biz?

14 Replies


I'm a former buy & holder moving forward and starting over after a downturn in personal circumstances, in the planning stage of creating a note investing company for and by myself.

I have been learning a lot about notes over the past three years through many sources (REI seminars, books "Paper Profits", and currently The Banker's Code"), podcasts, 401K Trust Companies/Custodians, note sites and blogs, including BP., NoteMBA, Distressesd Notes, PPR Fund, Notable Capital Fund, Naked Notes, The Note Queen and The Note Assistance Program).

i've also connected with a couple of less-than-a-year newbie note investors through my REI networking group and am finally in a position to invest again.


There has been a ton of interesting and helpful information provided but I still need to know this: 

What is the best business structure - LLC, business trust or ROTH Solo 401K?

The answers have been varied with a LLC mentioned most often.

But, because of the $800 annual tax CA imposes, a business trust has been mentioned next most frequently or out-of-state, "foreign" LLC's, which although cheaper to implement can have expensive drawbacks (extra tax return, costs if legal action out-of-state, etc), I've been warned.

My seed money is $15K of a $20K non-earned lump sum from Social Security. Ongoing, I'll have $1K monthly from Social Security to invest for the next 2 & 1/2 years and whatever the notes produce. Money from my 9 to 5 job is seperately invested in a retirement plan at work.

Can anyone recommend a Long Beach, CA area attorney and CPA who are experienced in working with note investors whom I can speak with to assist in setting up my business, please? 

I prefer live contact over online services such as Rocket Lawyer or Legal Zoom. 

An alternative to set up an LLC is a ost effective documentation service such as 'We The People'. They are hundreds of dollars less than a private practice lawyer. A drawvack is that they didn't have info about using a business trust as my legal structure.

I want clarity from the legal, tax and financial standpoints before I spend (waste) money on the wrong structure.

is anyone who has been through Jasmine Willois' Note Assistance Program, icluding the Note Lab, able to share their experience? 

It appears to offer the kind of solid, structured access to inventory, information, resources, training and hands-on guidance that I need as a newbie to more successfully implement the knowledge annavigate note investing than the 'bits and pieces' way I've been acquiring info so far. I'm looking forward to taking the upcoming Note Lab in a few months so any feedback about it would be helpful.

Also, what other books should I read and what else should I be doing to prepare for a successful note investing company? 

 Thank you.

LLC. You can't run a business inside of a retirement plan like a 401k. I don't think you have enough funds yet to start a notes business. It is capital intensive, and you need to have some reserves to deal with unexpected costs that will come up.

@Vee Dee, Without knowing your goals, objectives, etc. its a hard question to answer. As a general rule, I feel that the most secure way to invest in notes - at least to limit any liability, is through a series LLC. Each note goes into a separate series of the LLC and each series is a standalone entity, so any liability doesn't cross over to the notes in the other series, or to you personally. In Texas, an LLC can be set up online, using a Secretary of State provided fill in form, for a filing fee of $450.00, with no annual tax due. To make it a series LLC, you merely fill in "this LLC will be a series LLC" in the box provided.

Many people are of the opinion that there's minimal liability risk in owning notes. This was probably true 10 years ago.  Now, residential notes are at risk of lawsuits regarding Dodd Frank, CFPB, and FTC violations.  Both commercial and residential are at risk of environmental cleanup liabilities.  And if you have to foreclose on a property, you definitely want an asset protected remote entity.

The Roth 401K question is a totally different question, one in which structure is NOT the issue, but tax deferral is. Even in a 401K structure, I have my 401k own the series LLC as manager/member, and the notes held in each series.

Good luck with your investing plan, and I hope this is helpful information.

Tim, Justin and Don, Thank you so much for your helpful answers.

Tim, can you hive an idea of what would be a better amount to begin my business with? I've been told I could start with individual note purchases as low as $4,000 (mobile homes) or go in with two or three JV partners for $10K or $15K on a SFH note.

justin, Thanks for clarifying that. I was unawa

Don, I've often read your answers and comments to others on BP and appreciate your reply to me. I've learned a lot. I will research series LLC for California.

@Vee Dee

I have heard people in CA do a Delaware statutory trust to avoid the $800 a year. Not sure how accurate that is.

I would look to learn as much as possible on BP etc and just start righting questions down and grasp the understanding of the business

Also don’t believe people when they say this business is all rainbows and unicorns. For every good deal I can share ten stories of newbie investors getting burnt.

Hi Chris, I am un familiar with Delaware statutory trusts but woll research.

I'm sending this question out:

Are there any Califormia note investors here on BP who can chime in on what business structire you're using for your note business and why?

Thank you?

Asset protection considers both compartmentalization (containing risk between assets) and separation (containing operating risk from asset risk). The strategy that works for California is to have a LLC manage operations, and Delaware Statutory Trusts compartmentalize and hold assets. The DST allows for a structure similar to series LLCs, with all the coordination and flexibility that series structure entails.

This is my opinion, and not legal advice.

Hi Scott, Thank you for your answer. I'm learning more everyday. 

Can you elaborate a bit more about the 'operating' LLC, please?

I am guessing that the operating LLC is also set up in Delaware at the same time as the trust for all the other note business activity?

Will the cost for setting up and maintaining the DST and the operating LLC cost less than the $800 CA Franchise tax, initially and ongoing?

Will the existence of the Delaware operating LLC require an annual 'foreign' LLC tax return to be filed with CA?

If so, and depending on the cost and complexity, will the benefits outweigh just paying the $800 CA Franchise tax?

I realize there is a lot that I am unaware of, but I am starting with a tight business budget. Reserves and operating expenses will reduce the amount available for investing further, so I am trying to avoid unnecessary set-up cost mistakes as"do-overs" can be very expensive.

Any comments and insights are welcome. Thank you.

@Valenda D. I suggest that you keep it simple and do a CA, DE, or NV LLC. We looked into DST's a few years ago and I believe that it would've cost about $25-$35k to set up and then annual costs in the tens of thousands of dollars. The main advantage is that you get bank like status and don't need to be registered in each state.

We have a DE LLC that serves as our management company and it's registered as a foreign LLC in CA. Each of our investment funds is a stand alone DE LLC. They are the owners of the notes we buy. The Management company doesn't own any notes but is the Managing Member of each of the Funds that it sponsors.

For your needs, you're fine with just one LLC in my opinion. For the value of the notes you intend to buy, a separate LLC for each note is overkill in my opinion. If you build up to a certain level, say $200k or so, you might consider forming a 2nd LLC but that really is personal preference. Yes, there is liability when dealing with consumer, owner occupied loans but I think the risks are generally low.

I've met Jasmine a couple of times and Natasha once but I've never done business with them. My understanding of their business comes from several conversations but not from direct experience. They offer education and a community of other note investors so you're not left to handle your notes by yourself. They also have their own trading desk and sell to their community.

I don't have a problem with their business model as long as everything is disclosed and investors know the risks upfront. My understanding is that a lot of the notes they sell are lower balance (less than $25k) with lots of equity. You can make money with those (and I believe that they do) but you need to be aware of the extra risk of lower balance loans like these: fixed costs, lower quality assets, etc. Just make sure you have higher margins and spread your risk among several loans.

Andy, Thank you so very much fot your informative answer. The DST is definitely not the right option for me. Just curious, is the registration fee and tax of the foreign LLC a lot less than the $800 franchise tax for a regilar (standard) CA LLC?

I'll heed your advice and insights about the Note Assistance Program (NAP). That is very useful info.  Starting out, those lower balance/lower cost notes are what I'll be more able to afford. The NAP  akso offers the kind of hands-on support I need.and as far as I hear, it's all good news about Jasmine and Natosha. Your objective assessment is much appreciated.

Forgive me if this is a silly note newbie observation and question, but it seems that a note with a lot of equity and lower balance is safer and less likely to be defaulted on - What am I not understanding or overlooking about why that isn't necessarily so? Again, Thank you.

@Valenda D.   This post is exactly what I am looking for answers to. Valenda, how did you end up structuring your business? 

I was listening to the Naked Notes podcast and one of the speakers mentioned that people in CA can do a Business Trust, where you use a SDIRA and SEP IRA to buy notes. Then you get an LLC for the state the note is in. It is something I am considering to avoid the darn $800 CA LLC tax. Does anyone have experience doing this? If so, is it truly less expensive?

@April Banda

Yes, individuals with any nexus in California will benefit from using a trust as opposed to a LLC under the umbrella of an IRA.

The trust achieves the same goal of "checkbook control", which is being a legal entity that can be owned by the IRA and controlled by you.

The trust does not fall under the jurisdiction of the California Franchise Tax board, however. That means it does not need to pay the minimum $800/year franchise tax or file the complicated CA form 568 tax return.

i April,

After considering much advice, I formed a California LLC as the first step for my non-earned income.

I am in the midst of rolling over several former employer retirement accounts. I'd also like to use this money for note investing but of course cannot be mixed with the non-earned income in my LLC. Not sure if it is best to go into either a business trust and SDIRA situation or a Solo ROTH. Dur to so much conflicting advice I am scheduling a live strategy session with a firm specializing in entity formation strategies, legal aspects and tax advisement for real estate notes.

My communications with multiple custodians, attorneys and asset management firms has been informative but confusing. The firm I'll have the strategy session with has been very thorough in clarifying and explaining during preliminary conversations and has NOT rushed or pushed me to purchase, often very expensive services or packages as some of the others have. 

Note investing is a simple concept, but a complex undertaking. So much to understand. It can be very expensive if you don't get the right information and education to fully understand. 

ReSURE seems to be a firm which can help me streamline and simplify all of this. They embrace questions and are not impatient or overbearing with newbies in my experience in speaking with them so far. It is  why I am taking the leap to pay for the full in-depth, personal strategy session with them.

I am also starting an unrelated side business (ecommerce) for which I want some of my earnings to be invested for retirement into notes.

So a lot to unpack, but I'd like to get the framework/foundation/structure of my investing set up right and move forward as smoothly as possible.

I also continue to learn, reading books, websites and the news nearly everyday, listening to podcasts, watching note investor interviews on You Tube, participating in networking groups through Zoom and participating in mentoring calls with my investor group advisor.

The two note investing trainings I took were extremely helpful and the materials continue to serve as valuable resources.

I will say this-don't be in a rush. Take notes as you listen and read. Start sorting the info into categories that resonate with your personality, time to do this, and goals. Think through your goals and the end result you want. There are a multitude of options. It is important to decide and focus on what really fits with your personality and comfort level. Know how active you want to be or not. 

Do you like doing due diligence? Or do you prefer it to all be done for you? For example, passive, lower return investing in performing assets through a note fund might work better than the active, time-consuming, less certain route of non-performing note investing. Yes, the profits can be much more rewarding with non-performing notes but they can also take months to obtain, cost more upfront with unexpected, time sensitive payments and location, legal or administrative obstacles. For example, how comfortable are you with out-of-town investments? Do you need them to be in your State or even in your city? Can you afford to lose the money invested or spend $5,000 to-$15,000 more before the investment starts cash flowing? Or to get it cash flowing again?

Do not let someone (an investor? potential Joint Venture partner? Note seller? Note Broker? Entity Custodian? Lawyer? Asset Management service provider? "guru"?) decide for you. Take your time and get your info on your own till you you feel comfortable understanding it and explaining it to someone, especially if you plan to seek joint venture partners.

I found it very important to commit by scheduling time to actually work on your note investing. Set goals for what you want to learn more about in that time. You won't feel so overwhelmed by the "firehose" abundance of information out there and avoid "analysis paralysis". It will help you hone in on exactly what is helpful to know in reaching your goals. 

I hope this has been useful. I am happy to answer questions.

Good Luck.

Valenda Dennard                                                                                                                                                                                         Managing Director                                                                                                                                                                               Affinity Property Solutions                                                                                                                                                                                       

Thank you Brian and Valenda! I am so happy to hear that going the business trust route is a viable option, because $800 a year is so expensive and chances are I won't even make that much my first year in business.

You're right Valenda, there is much to learn. I am spending my days watching youtube, reading, watching webinars, podcasts etc... to avoid costly mistakes. I think I will love this part of real estate, but I'm definitely moving at my own pace and practicing due diligence daily. Happy to say I have met some great people along the way!