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Am I personally liable for business line of credit (LLC)?

1,898 Views | 10 Replies | Last: 5 yr ago by Hanrahan
Artorias
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AG
I am a partial (35%) owner of a side start-up business, separate from my day job. I am only partially involved in the day-to-day operations of the business, with the majority owner (50%) pretty much running the show. The hope is that if/when the business gets financially stable enough, I can quit my day job and work full-time for the new business.

My partner, whom I do trust and have known for several years, just contacted me saying he is trying to secure a revolving line of credit for the business. For that, he is requesting some information from me such as DOB, monthly mortgage amount, equity amount in my home, and annual salary.

The information about my mortgage and equity gave me pause. We have a pretty large amount of equity in our house (live in Austin area), that is currently a pretty large safety net for us, as we have not been as diligent about saving as we should (aside from 401k), and I was out of work for a year or so which drained much of the savings we did have.

For a business line of credit, could I be personally liable and at risk of losing my house, if the business was unable to pay the line of credit back? I know LLC somewhat acts as a shield against personal liability for business debts, but it seems like there are exceptions.

Any advice would be appreciated.
Bonfire1996
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He is asking because the bank will want background data on everyone with more than 25% ownership. They may ask you to personally guarantee, but likely not as you are not involved in day to day ops. Right now they are just papering the credit file.

If you like, you can ask before you give them this, "Are you intending to seek my personal guarantee?" If they are, you may want to demand a more equal footing, ownership wise, with your partner. In a liquidation scenario, the bank won't discriminate on its quest for restitution.
Bonfire1996
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You would have to sign a personal guarantee to actually be liable. Until you sign it, you are protected by corporate veil.
Artorias
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Awesome, thanks for the info.
500,000ags
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I mean the DoB and address info is purely Know Your Customer type data. They are ensuring you are not on OFAC or other restricted lists. The financial info seems like you are assuredly being thrown around for a possible personal guarantee, which is quite common for small business.
NoHo Hank
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Bonfire1996 said:

You would have to sign a personal guarantee to actually be liable. Until you sign it, you are protected by corporate veil.
*this is not legal advice, I'm not your lawyer*

The quoted is true so long as the company is operating properly as a corporation. It likely is, but you want to make sure that day-to-day operations are conducted at arms length from the owners. Examples of where this wouldn't be the case

  • Shared personal/business bank accounts
  • Co-mingled funds
  • Non-salary based/unscheduled withdrawals from corporate bank accounts to personal accounts
  • Lack of corporate structure (articles of incorporation, regular meetings with meeting minutes, etc.)

Odds are that's not going to be an issue for you, and to be honest, I'm not sure how courts construe alter-ego findings for LLCs in Texas, but the doctrine in question is called piercing the corporate veil. Basically, in some jurisdictions, courts will review a stringent set of elements to determine if the LLC is just an "alter-ego" for the owners. So, if this side business is just you and your buddy and things are a little loose regarding corporate formalities, I'd consult an attorney to make sure the liability from your LLC will actually protect you. If this is a well established business, you can likely disregard.

*this is not legal advice, I'm not your lawyer*
Zemira
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The KYCs for opening new bank accounts are in depth. I was at a company that had numerous subsidiaries (all business types). Each company that opened a new account had it's own KYCs. Didn't matter the parent company was the same. Didn't matter if a corporation, LLC, partnership, LP etc. Each company had to have a completely new workup of paperwork on the ownership.

Mostly the need for separate accounts were for legal purposes or international reasons, so it was a pain in the butt for the treasury team.
Hanrahan
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I can all but guarantee you will be required to sign a personal guaranty owing 35% of the company, regardless of your involvement, unless your partner is flat out loaded and liquid, and even then they will probably still require it. I was in a partnership as a 10% owner where one of the 30% owners is a Walmart heir, and I still had to sign on to the note personally.
austinrb10
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You didn't have to do anything. If you said no they would not have said no to the loan. A bank or lender is going to attempt to get as much "guaranty" as possible, but a 10% owner is not going to get a deal declined. Unless there are 10 10% owners or something else that makes a 10% owner close to majority. Typically 20% or greater ownership are the qualifying factors.
Bonfire1996
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10% wouldn't have even passed the consideration threshold if you didn't have significant decision making authority. Banks will ask for the moon for collateral, you have to draw the line somewhere.
AustinAgAnonymous
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I work as a commercial banker in the Dallas area and, the way i understand it, until you sign your name on a personal guarantee you aren't personally liable for the credit in the event of default.

Most banks will usually want any owner above 25% to personally guarantee any credit extended to the business so I wouldn't be surprised if you got a phone call from your partner asking if you are willing to sign some sort of personal guarantee, whether general or limited. The information he's asking for sounds like they are looking at sources of guarantor repayment in a worst-case scenario in the underwriting process.

Definitely don't take this as gospel but, in the event of a default on a loan in which you are a guarantor, there's only so many assets that the bank can come after legally the way I understand it. Definitely consult an attorney but the way I understand it the bank cannot go after your personal residence and protected retirement accounts. When looking at worst case scenarios for repayment, banks generally exclude retirement accounts from your total liquidity as they are protected assets.

Like I said, I work as a commercial banker in the Dallas area but the bank I work for is highly respected and in most major Texas markets. I am happy to discuss with you further and answer any questions you may have. If you shoot me a private message, I'll send you my contact information.
Hanrahan
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I was a managing partner. I had say over the execution of the deal, ergo, I had to sign on it no loan. As a 10% owner. This same scenario played out with multiple loans at multiple banks for various cre development deals. Of course I resisted signing on given my status and financial resources of my partners. Come on.
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