Should my private lender use an LLC or lend in his own name

[Nathan Waters]

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.

[Jeff S.]

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.