Personally Guaranteeing Loan for LLC Issue??

Question

I ran across something that caught my attention that had to do with getting a mortgage for an LLC. Say if the only way to get a bank to loan to the LLC that holds the rental property was to personally guarantee the loan, does that break the protection of the LLC say if it was sued by a tenet for getting injured. Like what if the Insurance policy isn't enough to cover the damages, can the tenet then go after the owner of the LLC personally since they guaranteed the loan with their own finances if the LLC couldn't make the payments??

Frank Chin · Answer

There ways to pierce the veil so to speak.

I'm in NY, and I am aware of situations where in S Corps, LLCs, owner are personally sued together with the LLC. The way it's explained, you are the owner of the property, and you are the property manager of the property. If you called about a dangerous situation, ignored it, the tenant got hurt, they are suing the owner, the LLC, and you, personally, in the role of manager.

If you hired a PM on the other hand, the LLC is the owner, the PM is the manager and you are just the investor, so the LLC and the PM will be sued. The PM will carry his separate E&O insurance.

When I had my business, it's in an LLC, I checked with my insurance agent to check and see if I am personally covered as well for lawsuits filed against the LLC. I had a sharp insurance agent, and I was. The people who sold me the business, which was in an S Corp was sued along with the S Corp. under the theory I mentioned. They were sued for $3 million and the S Corp only had only one million coverage. Whether they prevailed or not is another matter, they had to get an attorney for themselves, and worry if they'll be wiped out.

Their error was they assumed the corp. entity will give them cover. They didn't use an insurance agent and didn't ask the right questions, so didn't have personal coverage. And yes, banks will always ask for a guaranty. I had a SBA loan thru my LLC and the SBA and bank required a personal guaranty.

I assume you will self manage, but even here, lawyers will find a way to go after you, LLC or not.