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

Question

BACKGROUND

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.

INFORMATION & INVESTING

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.

Tim S. · Answer

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.

Valenda D. · Answer

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 unawaDon, 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.

Scott Smith · Answer

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.

Don Konipol · Answer

@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.

Chris Seveney · Answer

@Vee DeeI 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 businessAlso 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.

April Banda · Answer

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!

Vee Dee · Answer

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

Brian Eastman · Answer

@April BandaYes, 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.

April Banda · Answer

@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?

Valenda D. · Answer

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.