I formed my LLC last year in March, and during the months to follow, made some purchases with private lines of credit. I am the managing member of my LLC, and the purchases and the debt thereafter were meant for the LLC, but as the LLC was new, I had no line of credit to use at the time. Now that it is a year later, is there any ideas legally how I can transfer that debt to my LLC instead of having it remain private debt? It is all HELOC debt, btw. What would be the best course of action in the instance something happened in the future, and I was unable to repay the debt? I would rather the LLC go bankrupt than myself privately. Thoughts?
The LLC would have to refinance the debt in its own name, but you will most likely have to personally guarantee the loan anyway.
If the LLC goes bankrupt, creditors will scrutinize you as the managing member for any fraudulent transfers or conveyances as well as any violations of corporate formalities. You should really get your money back from the person who set you up as the managing member. That is one of the worse moves you can make. The worst would be setting up the LLC as a single member LLC.
So what would you recommend to someone that wants to move privately held properties like this?
The question is unclear. Moving Debt or assets? Do you want to move personal debt to business? If so, why?
Do you want to move personal assests to a corporation?
Sorry for the vague question. I have one primary property and one rental. I remodeled my primary property by maxing out credit. The rental property is close to 100%LTV. My credit score dropped by 180 points by buying the 2nd house and maxing credit even though I have never missed a payment. I’m trying to alleviate some of this by moving a property into a business entity and would like to build credit as a business to buy commercial property.
Moving your debt into a corporation will do nothing to alleviate your debt. You will still be personally responsible for the debt even if you set up a corporation. However, if you are willing to personally guarantee a credit line for your new corporation, you may still be able to get a significant line with your current credit score (no guarantee in this credit market).
For example:
You start a new C-Corp and open up a new business bank account. The banker says, “Hey, a special offer for a line of credit of $10K with no annual fee for 2 years when you opened this new account…” You say, “ok” and now you have a “corporate” line of credit for $10K. You then transfer 10K from your 2nd mortgage over to the corporate credit line. The balance as well as the new corporate account does NOT show on your personal credit report, UNLESS you ever go late. If you miss a payment, the 10K AND the corporate account will magically appear on your personal creidt report.
Building business credit is not a simple or quick process. Your corporation must:
1 - be fully compliant (current) with all state licensing and certifications
2 - have its own source of REGULAR INCOME (banks will check your account for regular deposits into the business account)
3 - have its own bank account and bank RATING (1 to 5, 5 being accounts that maintain balances of 25K or more per month)
4 - have its own non-personally guaranteed revolving accounts (business and industry vendors)
5 - have at least 2 years worth of its own tax returns
Now even after all this, your new corporation will still likely need to put 20-30% down to get a commercial mortgage on its own without your personal guarantee. If you don’t believe me, go to a commercial real estate lender and get a list of requirements for getting a commercial loan. You have a worthy goal, but to get there you have to start now and anticipate it taking a full 2 years for your corporation to get loans on its own for RE investments.
I believe you. You know the old saying “Never take financial advice from someone who makes less than you.” I’m here to learn.
Now I need to research what kind of corp to set up for my goals. I am really interested in mid-sized apartment complexes, 15-50 units. Might also pick up some less expensive single family homes. I plan to be involved in the day to day proceedings until I can turn it over to someone else.
Thanks for your information and input. Any advice is greatly appreciated.
The two considerations when deciding what kind of corporation to use are: Taxation and Asset Protection. To get some general knowledge on taxation of the different entities, you should read the tax series by Sandy Botkin, “Lower Your Taxes, Big Time!” and “Real Estate Tax Secrets of the Rich.”
The other consideration, Asset Protection, requires more analysis of your sitation and goals. Generally, you want to mitigate your risk of losing your business and personal assets in a law suit by setting it up so that you or your “risky” operation does not own anything to sue for. So often people will operate as a C or S corporation (difference is way the corp is taxed) and own their assets in a different type of corporation. So be prepared to end up with a corporate structure, a series of corporations, rather than just one type of entity. The NOLO series of guides, especially "Legal Guide for Starting & Running a Small Business"is a good starting point. It’s a lot of information, but well worth the effort.
Also, may I humbly suggest that you go about actually putting your investing goals into a formal Business Plan. Having a thorough business plan really helps to hone your goals for the business and may save you from avoidable mistakes or delays. A good place to get a business plan template is your local bank. They have a list of required elements from which they will underwrite your business loans. These pre-quals are usually more strict than RE loans, so if your corporation can qualify for these, getting a mortgage will be much easier. NOLO also has a book on business plans, but I prefer using the bank’s as it shows you what elements are most important to the underwriters.
Good luck!