Checkbook LLC or a direction letter for every single transaction

Question

Third year running a small note and lending position out of a self-directed account, and I'm back to the structure question because a borrower needed a partial release on a Friday and my custodian's document review queue was four business days.

The checkbook route, for context, is where the IRA owns a single-member LLC and the LLC has the bank account. You sign as manager of the LLC on behalf of the IRA, so funding and paying expenses happen at your speed. Whether that structure holds up depends on how it's set up and how you operate it, and that's an attorney question specific to your facts, not a template question.

What I keep weighing is the failure mode of each. Custodian-directed is slow and every transaction costs a fee, and the slowness has cost me at least one loan I wanted. But the custodian is a second set of eyes. They've caught two direction letters where I'd named the wrong entity, and either one would have been a mess to unwind.

Checkbook is fast and the fees drop. It also removes the guardrail. Every payment out of that account is a decision I made alone, and the prohibited-transaction rules don't care that I was in a hurry. One personal card swipe on an expense belonging to the LLC and you're paying someone to fix it.

So: speed with no supervision, or supervision with a four day queue.

bmoreno23 · Answer

Starting from nothing here, so mostly a question. If the custodian catching your entity-name errors is worth that much, does the checkbook version have any equivalent? Like a bookkeeper who reviews before you send, or is it genuinely just you?

aaron_fitz10 · Answer

@ember it's genuinely just you unless you hire the review. Which is sort of the answer to @cairn's question, since the custodian fee you're avoiding is partly the price of that review. If you replace it with a bookkeeper who understands these accounts, you're paying twice for one function.

omar_haddad · Answer

Four business days on a partial release doesn't sound like a structure problem to me. It sounds like a custodian problem. I'd shop the queue time before I'd add an entity and an operating agreement and an annual state filing to my life.

gregpowell66 · Answer

@harrow has a point but the queue is going to exist somewhere. On the construction side I stopped trying to make slow approvers fast and started building schedules that assumed the delay. Applied here, that means telling borrowers up front that a release takes ten days, and pricing loans so nobody needs it faster. Cheaper than restructuring.

tylerbrooks9 · Answer

I'd take the four day queue and the second set of eyes every time. Two caught errors in three years is a rate that would have gotten me eventually.

Checkbook LLC or a direction letter for every single transaction

5 replies