Lending with or without LLC-Pros and Cons

[Raj G.]

Hi,

I have been doing private lending at small level with my own money that me and my wife earned.

I was doing on our own name, no LLC involved.

Now I was thinking opening a LLC.

Just need opinion what are pros an cons doing private lending under LLC?

Do I need some type of insurance, any other thing I am missing that I should take care.

Thanks

[Edwin Epperson]

@Raj G. so I have a few questions, but first to answer your question(s). General rule when it comes to this space, CONSULT AN ATTORNEY! So generally speaking, don't worry about creating an LLC if you are NOT thinking of building a PL business. However, you may need to dive into this based on the laws of the state which you are making loans in. Earned interest is seen as ordinary income whether through a business or personally. However, if your answer to my question #1 is business model then yes you will want to create an LLC. As far as insurance you will not need workman's comp, unless of course you hire employees, and run an actual business. The type of insurance you MAY think about getting is errors and commissions insurance, and key man insurance, but again this is primarily if you're running a business of making private loans. So a few questions for you below...

#1: Are you wanting to make private loans as an investment, or as a business model?
#2: Are you only lending out your money or do you want to lend out other investors' money?
#3: Where are you lending?  Do you know the laws in that state that regulate private lending, if any?  Based on the laws of that state will dictate if you need to operate your PL out of a business or if you can do it personally, and what the threshold is before you must register your PL activity as a business.
#4: Are you holding onto these loans all the way through reconveyance (when they are paid back)?  If so this is called servicing, and some states require a lic to service loans, even your own loans.
#5: Who ar your borrowers and what type of assets are you collateralizing?  Each state has different laws regarding borrower types and asset types.  
#6: Who are your borrowers, and what type of collateral are you securing with your loans? General rule of thumb is as long as you are making a loan to a business (your borrower is an LLC/ Corp), and the managers/ owners of the entity DO NOT live in the property then you probably will not need a lic. But there are states where that type of lending is still regulated and requires a lic, or requires the lender (the one with the money) work through a lic broker/ lender to be able to make your loan.

This is just scratching the surface of all the questions you should know the answer to before striking out on your own and building a PL business.  There are MANY, MANY more questions as well,  but I won't tie up the thread with those.