It has come to my attention that a LLC is some what hollow until your business is considered commercial. Here is what I mean by hollow. Your LLC has no true assets or liabilities until your property is five units or greater. Up until this time, all of your assets and liabilities are personal as far as the bank is concerned. Even if you have the property paid for. Your bank sees the property as personal even if it is quit claimed into the LLC. It is my understanding in order for the LLC to truly stand alone it must be commercial and you are not commercial until you have five or more units. Please help me understand if I'm starting to see LLC's correctly.
Where did you hear that? That is a new one.
BTW read post from Serge about getting his loan called because he transferred his interest into an LLC.
There is some question about a single member LLC though.
This is not my understanding at all. Your assets in the LLC are the LLC's not yours. You may be personally on the hook for any outstanding loans if you signed a personal guarantee, but the amount of units makes no difference. You could sign a personal guarantee and own 12 units if that is how the loan you agreed to is structured.
The LLC debts could also be considered personal if you don't treat the LLC as a separate entity by not following proper operating procedure (see your state's laws), such as by co-mingling funds, etc. Also in the case of a lawsuit, a one person LLC might be considered to essentially just be you and then you could be personally on the hook for a ruling against the LLC.
This is the realm of underwriting more than the legal aspect of your entity. An LLC is known to be established as a liability ploy, a business write off matter for small investors. The assumption will generally be that you formed LLC as a liability ploy more over a business strategy, as a business strategy you'll need several holdings. Much also has to do with the LLC capitalization, as it may stand alone based on its own holdings and the fact that most LLC's are under capitalized, thereby leaving them vulnerable to challenges of really being a stand alone business other than a ploy of an individual operator. The perception of your liability protection of closely held corporations is almost a myth, if you operate it, it is most likely going to be vulnerable to a challenge, piercing the corporate veil. Banks understand this and will adjust the underwriting accordingly, just because you claim to be in the business, doesn't mean you are afforded the real, in reality, provisions of a business, you are still personally liable.
You may not need 5 properties in a business, you might have one property with greater capital in the business name, 20K in equity on one property and 80K in other assets may put you well into the commercial arena. It has to do with amounts at risk, equities, as well as the income generated from that business venture.
So, yes, having an LLC doesn't mean you're really in business, not a going concern. :)
Thank you for this understanding. This is also my understanding. A true LLC would be hold the assets and the liabilities not you personally. It's easier for a lawyer to pierce the veil if you own all the asset and liabilities and not the LLC Everything is in your name and not the LLC. The LLC owns nothing. So, Question: Does the LLC really protect you and your assets when you're small?
You can't own the assets, the LLC must. A one member LLC is tough since you manage it, that's another issue. An LLC must be properly formed, managed, capitalized and have assets at risk, created in its name and operating as a business concern to provide liability protection. Folks need to see their attorney and conform to local practice, just because you file Articles of Incorporation doesn't mean you LLC will be working as you might think. :)
The problem most peoples LLC s assets quickly grow larger then your personal assets They are great from ease of creating business partnerships,ventures but as @Bill G mentions they are easily vulnerable to lawsuits especially since many single person llc personal income are not filed on separate returns
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