How does personal credit affect LLC?

Question

I have a partner who has all the resources, but poor personal credit.  I have very good credit.  We want to form an LLC, but if we try to get a loan, will his credit affect our chances of potentially getting a loan?

Sam Ally · Answer

You can form an LLC. & your partners credit wont matter.  Applying for a loan under the LLC may/probably will require a personal guarantor which you can sign for.  this may be a good way to initiate building credit for the LLC.  Always, always check with legal counsel & tax specialist.  Also cover your "assets" in any partnership agreement.  Remember if you are personal guarantor the liability is on you. Make sure if you are setting up the LLC to hold property that any profits made from that holding is earmarked to pay back the loan first.  Talk with your attorney.

Josh Green · Answer

sam's info is not entirely accurate.

many lenders will require all managing members of an LLC to be personal guarantors. the last bank i worked for required any member that held 20% or more of the company. my current employer requires ALL shareholders (even if you own only 1%).

personal credit will certainly play a factor.

good luck!

Josh Green · Answer

no, they aren't using a personal guarantee because they are scams. good luck!

Scott Hubbard · Answer

I usually split 50/50 on rehabs with my JV partners. I recommend your partner JV with this rehabber.  Your partner writes a check to the title company for the purchase price of the property and gets the title.  The rehabber then finances and manages the renovation.

If your partner wants to reduce his split for the value of the education, then I see no problem with this.

There is a simplified JV agreement located in the Fileplace (under the resource tab) of the site.

Good Luck

Jason Elbers · Answer

Thanks Scott for the info and advice.  Love the idea of adding to the operating agreement.
This is a whole new topic, but I see from your website that your experienced in this area...
We will be seasoning just enough money for down payment, plus a little more just in case.  While waiting for the money to season, my partner wants to use $150,000 or so to invest in a friend's rehab business.  The $150,000 is separate from the money being seasoned.
What kind of return should he be asking for?  A percentage return on his money only?  Percentage return plus a share in profits?  Or just a share in profits?
Keep in mind, this friend will also be somewhat mentoring us along the way.
Any advice as to what is fair?

Scott Hubbard · Answer

This is possible, however, you should consider a couple of things.

1.  Since you're the only guarantor of the mortgage, you have more skin in the game becuase you stand to lose more than the principal in a default scenario.  With payment penalties, legal fees, foreclosure costs, you might be stuck with these costs as the guarantor.

In your LLC operating agreement, you should plan for the worst with the worst being that all partners are responsible for repayment of all debts including those that are guaranteed separately and outside of the partnership.

2.  Since the risk factor is greater for you, I suggest you get a larger percentage of the profits.

3.  When you transfer title to a partnership (LLC), you might be adding additional risk if your partner has creditor's trying to extract payments on bad debts or even a judgment.

Another way for you to do this is a joint venture agreement.  You and your proposed partner have separate LLC's where both enter into a joint venture agreement.  Example:

LLC A (you)  and LLC B (your partner)

LLC A holds the property with LLCA and LLCB co-managing and financing the rehab and resale of the property.  The priority of payment goes, loan balance, rehab costs, carrying costs, selling and closing costs, then splitting of the proceeds, if any.

Since your LLC holds title to the property, then you avoid the risk of passing equitable interest onto your partner through the transfer to a partnership.

CYA, anytime you partner up.

Jason Elbers · Answer

I am currently in the same position as Maryann.  I have good credit and little extra money, he has money but poor credit.  Our plan is to have him "loan" me the money we would need to finance our first flip, and I would open a bank account in my name for the money to season (60 days).
I would finance the property in my name, then immediately quit claim it to our LLC.  I believe I can do this with 3 properties at any given time.  
Will this approach work, and is it a good approach?
Are there any other ways to accomplish this that we should consider?
Thanks for any help.

Socorro Garcia · Answer

Ha ha ha!!!! Thanks.  No scams for me!

Socorro Garcia · Answer

Hello All!  What about those companies that make their money buy incorporating you and telling you that they can get you corporate credit..in so many days....are they not using any personal guarantee?

How does personal credit affect LLC?

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