What's the best way to loan- in your own name, LLC, etc?

Question

What's the best way to loan private funds?  I know a lot of people who do it in their own name, but would it be better/provide more protection to loan via an LLC or something else?

George Blower · Answer

@Brit F.

@Hen Ley

Regarding the comment that if you lend money from a retirement account you would use an LLC:

1. While it is certainly true that many people lend their retirement funds via an LLC, it is not strictly necessary.

2. For example, if you are self-employed with no full-time w-2 employees working for you, you could rollover retirement funds (e.g. from a former employer plan, non-Roth IRA) to a bank account or brokerage account in the name of the Solo 401k and then lend directly from the Solo 401k (with no LLC utilized).  In that case, the loan would be payable directly to the Solo 401k.

3. If not eligible to set up a Solo 401k and you have funds retirement funds which are eligible to rollover (e.g. funds not in a current employer plan), you can rollover retirement funds to an IRA at an IRA provider which allows for alternative investments.  You could then loan the funds directly from an IRA (with no LLC utilized).

4. I note that many with self-directed IRA accounts do invest via an LLC.  Doing so provides you with checkbook control, minimize the fees charged by the IRA custodian and minimizes the time/involvement of the IRA custodian.

5. Regardless of which structure you choose, it will be important to work with an experienced provider that can help you understand that rules (e.g. you can't loan funds to a related person, etc.).

Justin Windham · Answer

@Hen Ley

While you can loan in your own name, using an LLC is a common method for adding liability protection. Many people use self-directed IRAs and 401ks to loan so that they can grow their assets on a tax-deferred or tax-free basis.

Hen Ley · Answer

@Scott Smith, thanks so much for taking the time to reply with that additional info!

@Brit F., thanks for the reply and tip regarding a private mail box!

Brit F. · Answer

@Hen Ley, form an LLC when you have a business need for it.  For example, if you want to lend using $ from a retirement account, you would create an LLC.  If you want to lend by pooling multiple investors' capital, create an LLC.  If you just want to loan money as an individual from your personal bank account, you don't need an LLC.  Sure, you can create one, but just be conscious of whether it's for a business need or risk mitigation.  If it's risk mitigation, insurance may serve the same purpose...just depends on you, your risk tolerance, and your long term needs.  The most conservative approach would be to create the LLC and have the right insurance coverage.

No matter which way you go, get a private mail box (similar to a PO box) so that you don't give borrowers your home address, especially if your loans are secured and filed for public record.

Scott Smith · Answer

Oh, my apologies. It depends on what type of lending you are looking into. There are many different opportunities available to you. For myself I always want as much protection as possible when partnering and investing. If I am financing an investment with a partner who will be doing the work I always want to work through an LLC with a solid operating agreement. The LLC offers several benefits. (1a) It separates the liability between you to your investment and (1b) vice versa from the investment to you. (2) It separates your partner's personal liability from the property. (3) It allows you to create an operating agreement that allows you to establish protocol for different situations (what happens if it loses money for too long and someone wants to pull out?) There are other benefits, but that is what I am personally concerned with.

If you are part of a larger group, then there are more demanding entities that can be utilized. I would just avoid anything like a general partnership - essentially a handshake. You are basically marrying yourself to that individual, so any problems from the investment or their life can splash into yours. I wouldn't risk my wealth based on a single investment, so I always create protections to avoid issues, and the benefit of those steps is that it also ensures we always know what needs to happen under the circumstances that we laid out in the operating agreement.

This isn't legal advice, just my opinion as a real estate investor.

Hen Ley · Answer

@Scott Smith, Hey Scott,  Thanks so much for your insights.  I'm actually asking from the lender's perspective-  I'm looking at getting into private lending.  Is it best to lend in your own name, an LLC or something else?

Scott Smith · Answer

If you are looking for financing, then the best rates you will find are through your personal name. You then want to ensure you have protection for the property, but this can sometimes be a bit tricky because banks will threaten the Due on Sale Clause. If that is the case, This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the trust has been established. This means your name does not appear on public record for that property, your attorney and their address is the only thing that appears.

Just some thoughts! I work with these types of structures quite often. The reason banks can't execute the Due on Sale Clause for the type of transfer is because the Land Trust is considered an inter vivos trust, essentially an estate planning tool, and is protected under the St Germain Act. This means you get the beneficial financing available from your own name while also having the protection of an LLC for the investment.

This isn't legal advice, just my opinion as a real estate investor.

Gary Headrick · Answer

I'm sure there are several opinions on this one. I use an S Corp which has worked well for me.

What's the best way to loan- in your own name, LLC, etc?

Most Popular Reply