Warbucks - Red Inc for lending and fix-and-flip/rent?

[Jack Nichols]

Am looking for the right entity structure. It would be great if you can poke and plug holes. I do intend get a CPA’s input and an attorney’s input after revisions.

As I started writing this, I realized that many on this board are thinking something along these lines as well, though not explicitly captured.

Current Context:
1. I have some money in different buckets that I would like to use for real estate investing: regular IRA, Roth IRA, current employee 401k, Home Equity Line of Credit.
2. I currently work full-time (unrelated to real-estate) and drawing salary.
3. The idea is to set up a multi-member LLC with Solo-401k. Then roll over my regular IRA to the Solo-401k.
4. Also, set up a single-member LLC that is used for fix-and-flip or fix-and-rent.

Immediate business opportunity (over the next couple of weeks to a month): Some fix-and-flippers and fix-and-rent’ers in Baltimore are looking for hard money lending. Even though fix-and-flippers are working on residential properties, they will borrow on a commercial basis (unlike homeowner mortgages which have significant mortgage borrower protections).

Medium-term opportunity: In addition to hard-money lending, I am also looking at opportunities to fix-and-flip and fix-and-rent properties myself.

Proposed Entity structure: Use the WarBucks - Red Ink strategy (see http://www.homesteadschools.com/legal/Lawsuit%20&%20Asset%20Protection%20K.%201.pdf ).

1. Set up a Wyoming based Multi-member LLC (say, Wyoming WarBucks LLC)
1.a. My wife and I will own 98% of Warbucks LLC. My sister-in-law will own 2%, Reason for setting it up a MMLLC: Greater asset protection from outside liability (for e.x., when I am at-fault in an accident and others sue me for damages).
1.b. Use Warbucks Inc purely to lend money. Warbucks primarily (say 99% of the time) lends is to Red Ink. It lends secondarily (say 1% of the time) lends to others (3rd party Fix-n-Flipper LLC).
2. I establish a solo-401k for Wyoming WarBucks and rollover all my IRA money to the solo 401-k.
2.a. Use my solo-401k at Warbucks purely for lending hard-money to others and other passive investments.
3. Set up Maryland Red Ink LLC that is 100% owned by my wife and me.
3.a. For my Fix-and-flip or Fix-and-rent activities, Warbucks lends money to Red Inc. Red Ink uses the borrowed money to purchase and rehab. Warbucks lends money at a high interest rate (say 15% to 20%) such that Red Ink almost always breaks even or makes a slight profit or loss. Warbucks collects interest from Maryland Red Ink and does not have to pay FICA, FUTA, and state tax (since they are interest payments).
3.b. Red Ink’s net worth is minimal – say 3% to 5% of assets. Its remaining assets are borrowed from WarBucks.

Impact on Taxes: Minimize taxes (esp. FICA, FUTA, state tax rates on fix-flip jobs) and audit probability (John Hyre writes that single-member LLCs have a high likelihood of an audit, whereas MMLLC’s audit-rate is low).

Impact on Asset protection: As Red Ink has minimal net worth and is heavily indebted to Warbucks, Red Ink is not an attractive target for lawsuits. Warbucks being a MMLLC has greater asset protection against outside liability.

Questions that immediately come to mind: Does it make a difference if Warbucks is a Wyoming or Maryland entity? Warbucks will lend almost exclusively to Maryland businesses. Will that mean, the Warbucks has to be registered in Maryland as a Foreign entity? If the entity is registered in Maryland, will Maryland levy state taxes on Warbucks LLC profits for LLC members who are Maryland residents (since Warbucks LLC is a pass-through entity)? What if the entity does not have to be registered in Maryland?