I’m wondering if any one out there can help me when it comes to buying a house for rehab inside an LLC. Some lenders I have talked to say that the LLC needs to be able to stand on it’s own and that a new LLC, under 2yrs, is very hard to get loans for NOT IMPOSSIBLE but very hard. Mainly because of the fact it is very hard to come and get a property out of an LLC. This is what I am told and hope someone can help.
How does a newly formed LLC buy a house without asking for a personal guarantee? And is a personal guarantee the norm untill the LLC gets established?
So what you are saying is that the primary person on a mortgage may be the LLC but I personally gaurantee the loan (cosign). And in the event something happens and someone sues the LLC the property is protected and the personal gaurantee means nothing in a law suit.
Am I correct?
What happens if “they” win the suit what would be the ramifications?
No, the purpose of the LLC is not to protect the property; it is to protect YOU. If they sue the LLC, the LLC does not protect the property, it protects your other assets. LLC property is always available to satisfy judgements against the LLC.
Your personal guarantee of LLC debt does not make you liable for a judgement against the LLC. You ARE liable for the mortgage if the LLC defaults.
However, if YOU are the property manager who negligently didn’t repair that loose board, YOU can expect to be sued personally, too.
I came across this problem several years ago, I just bought a shelf corporation dated to 1998 and formed and LLC to be under the corporation. So most of my purchases take place under an LLC whos parent company is this shelf corporation.
So Mark tell me if this is right. I f I personally gaurantee a loan for a property and someone sues the LLC inwhich the property is legally in and there is a judgement against the LLC, the property could be sold to satisfy the judgement and hopefully the property would bring at least what is owed on it and satisfy the mortgage first and any liens or judgements after that? what gets paid in second position a second mortgage or a lien or judgement? (Not counting a tax lien.) And If the proceeds from the sale did not add to the loan amount then I would be kiable personally to settle the amount due to only the first position and not any after?
I don’t think the comment about LLC member interests not being vulnerable to creditor claims is true.
Personal property, in a worst case scenario, certainly is available to creditors. (I had a real estate developer client a few years ago who lost not only their interests in their properties but also a bunch of personal stuff, including art, cars, and so on.)
I do remember the guy who bought the judgement saying, proudly, that he wasn’t going to take their really personal stuff… like clothes.
A judgement creditor of an LLC member cannot obtain membership or control of the LLC. The most the creditor can obtain is a charging order against LLC income, which can be frustrated.
From the Texas LLC Act. Every state I’ve read (15 or so) is similar.
§ 101.106. NATURE OF MEMBERSHIP INTEREST. (a) A
membership interest in a limited liability company is personal
§ 101.114. LIABILITY FOR OBLIGATIONS. Except as and to
the extent the company agreement specifically provides otherwise, a
member or manager is not liable for a debt, obligation, or liability
of a limited liability company, including a debt, obligation, or
liability under a judgment, decree, or order of a court.
§ 101.112. JUDGMENT CREDITOR; CHARGE OF MEMBERSHIP
INTEREST. (a) On application by a judgment creditor of a member of
a limited liability company or any other owner of a membership
interest in a limited liability company, a court may charge the
membership interest of the member or owner, as appropriate, with
payment of the unsatisfied amount of the judgment.
(b) If a court charges a membership interest with payment of a judgment as provided by Subsection (a), the judgment creditor has
only the rights of an assignee of the membership interest.
(c) This section may not be construed to deprive a member of a limited liability company or any other owner of a membership
interest in a limited liability company of the benefit of any
exemption laws applicable to the membership interest of the member
§ 101.108. ASSIGNMENT OF MEMBERSHIP INTEREST.
(a) A membership interest in a limited liability company may be wholly or partly assigned.
(b) An assignment of a membership interest in a limited
(1) is not an event requiring the winding up of the
(2) does not entitle the assignee to: (A) participate in the management and affairs of the company;
(B) become a member of the company; or
(C) exercise any rights of a member of the
I’ll ask one of the attorneys who works with my on the do-it-yourself limited liability company kits about this. Carl Baranowski, e.g., the stanford law school grad who wrote the operating agreements for my llc kits is current member of Texas bar and a current or past member of bar of several other states as well (e.g., Florida). Then get back to group.
I didn’t get a chance to talk with the guy I usually use but I talked with another real estate attorney this afternoon who also does a bunch of bankruptcy. Mark, I have to say that you were largely right. :beer Here are a handful of the things that this guy (Jim Dickmeyer for anyone in Seattle area) said about Washington state LLCs:
Neither a judgement creditor nor a bankruptcy trustee can grab your member interest… They can only grab distributions from the LLC…
With a single member LLC and an amateur operating agreement, that’ll mean that an LLC probably doesn’t offer you much additional protection but…
With a more sophisticated structure, you could still potentially extract value from an LLC through your control of the LLC as, e.g., a manager. E.g., you might lose all your distributions to the judgement creditor or to a bankruptcy trustee… but you might also be able to make your son-in-law the property manager and pay him for his work.
He also thought that, for estate planning reasons, the ability to peel off fractional interests for kids, grandkids, etc. was much easier in an LLC.
All this said, even though he makes money setting up LLCs, he doesn’t think the extra paperwork and cost is automatically justified. He does feel like you’ve got to have a certain critical mass to make the overhead justifiable.
I’ll post any useful comments that Carl Baranowski has, too, if he shares. That guy is truly a legal genius.
St. Petersburg real estate attorney Carl Baranowski (see www.carlbaranowski.com for bio) shared this comment about the question…
Note to moderator: Please consider leaving in link to Carl’s web site, it provides a biography of his legal and real estate credentials and that info should help anyone interested in this topic assess his technical skills, etc.
Anyway, here’s Carl’s comment:
"Concerning creditor access to LLC member interests, some states’ LLC statutes prevent creditors from foreclosing on LLC member interests, treating them like limited partner interests under the uniform LP act. More states seem to be revising their acts to incorporate such provisions. See the attached info from CCH on this subject.
"If a creditor is after a member interest of an LLC formed in a state that prevents foreclosure, it can still obtain a “charging order” that gives the creditor the right to receive all distributions with respect to the member interest. Even so, the creditor in this case will not be able to vote or to sell the interest or to exercise any rights of the owner.
"There is some debate whether the creditor with a charging order over an LLC interest has to pay tax on allocations of LLC profits, even if there are no distributions. This is apparently unsettled law, and just the possibility of owing taxes in such a situation may scare off many creditors from seeking charging orders. (If a creditor can foreclose, it’s strategy would more likely be to foreclose and sell in quick succession in order to avoid any such tax liability.)
IRS definitely considers assigned interest in a charging order taxable to the recipient. Thus the creditor would be liable for taxes on LLC income even if no distributions are made.
Note, also, that the LLC continue to operate even under a charging order. Thus, debt payments to the individual can continue, allowing the individual (or friendly parties) to continue to receive cash. Charging orders are generally useless to the creditor since the manager just never declares a distribution, but continues to pay salaries, make 401(k) contributions, pay debt, etc.