Choice of Entity to hold a note

[dsi]

Two individuals asked me what form of entiy they should have as a vehicle to acquire a Note Receiveable. It is a 2 year note, with a baloon payment of about $200,000.

Should the borrower default on the note, the 2 individuals will get a bowling center complete with a restaurant and bar (which is what the note holders want).

S-corp? LLC? P/S? Any suggestions?

[JoshinNC]

I'll take a wag

I would say LLC due to the fact that in the event the entity does become owner, and then wants to remove the property from the entity it could be distributed to the members without creating a taxable event. In this case the members could elect to distribute the center and bar to themselves, continue to operate it as is and not have a taxable event until they sell it, even if it has appreciated.

[Corduroy Frog]

Beware a Corporation

I would vote against a corporation, unless a corporation is so attractive that they are willing to pay the personal holding tax. As I understand the question, the only purpose for this entity is to accommodate the receivable and earn interest.

The previous post, an LLC, may be a good choice, but doesn't really answer the question since IRS ignores LLC for tax purposes. If they use an LLC, then what entity would they choose for tax purposes?

If someone twisted my arm and made me give a single answer, I would have to say leave it in the name of the individuals until such time as default occurs (if that happens).

[dsi]

Thanks guys. My after thoughts are to have the two individuals acquire the Note as "individuals". Then, when the debtor defaults on the balloon payment, have the note holders form an LLC, taxed as P/S and contribute the Note to the LLC.

I believe this will provide much needed protection to the individuals as they operate the bowling center.

[jainen]

amount of their investment

>>this will provide much needed protection to the individuals as they operate the bowling center<<

It will provide some protection related to the property, but almost none related to "the individuals as they operate" the facility.

They should discuss liability with an attorney and insurance agent before acquiring the business. As long as they are holding the note, however, they are probably only liable for the amount of their investment.

[George Boutwell]

I would say LLC due to the fact that in the event the entity does become owner, and then wants to remove the property from the entity it could be distributed to the members without creating a taxable event.

How much does it cost in NC to have an LLC? As I understand it, in California (where the OP practices) the annual fee is $800.

Would that make a difference to you?

[JoshinNC]

$200 annual fee

How much does it cost in NC to have an LLC? As I understand it, in California (where the OP practices) the annual fee is $800.

Would that make a difference to you?

$25 fee for corp., plus franchise tax based upon earnings