Protecting Your Personal Assets

[Roy Vereen]

Hello BP,

I am a newbie from Columbia, Md. I am in the process of creating a LLC to protect my personal assets from my investment assets. Question, once this is done will lenders check the credit score and finances of my company or the members of the company?

[Brandon Hall]

@Roy Vereen They will check the members' credit scores and hold them personally liable. Without a seasoned entity, you will have to personally guarantee (and qualify for) all loans to the entity. 

Keep in mind, loans to entities will be more expensive to acquire and maintain than personal loans. 

[Alexander Merritt]

@Roy Vereen

Just search for this on BP. This has been discussed on here at length probably hundreds of times. It's basically a trade off between asset protection vs easy of financing. A lot of BP'ers will tell you that LLC's when you first start off aren't worth the hasle if you are a single investment and don't actually provide you with any real Asset Protection because any compentent lawyer will be able to "pierce the corporate veil" and then you will be personally liable for any lawsuits that result from your business. I don't necessiarly agree with that because LLCs were designed to give you that protection provided you run the LLC exactly to the letter of the law.

As @Brandon Hall mentioned, having and LLC will make it more difficult and expensive to get financing because the LLC has no real assets to go after in case of default or bankruptcy.

[Steve Vaughan]

I put my multi-families 5+ units only in LLCs.  I have never put a residential single-family in one, especially after the fact with a quitclaim.  The financing barriers are there as mentioned by @Brandon Halland @Alexander Merritt, plus obtaining insurance for a 'business' on a residential property is difficult as well.   It's good to think ahead, @Roy Vereen.  One thing I did do right off was establish a mgt co (for my own properties only) in an s-corp.  That has worked out well.  Just don't mix business entities and residential property and you should be fine!

[Roy N.]

Originally posted by @Brandon Hall:

@Roy Vereen They will check the members' credit scores and hold them personally liable. Without a seasoned entity, you will have to personally guarantee (and qualify for) all loans to the entity. 

Keep in mind, loans to entities will be more expensive to acquire and maintain than personal loans. 

Brandon:

Is that a universal truth when borrowing in the U.S.A.?

Here, when dealing with residential properties, there is no difference in the cost of borrowing against a mortgage whether the mortgage and title are in your personal name or that of a corporation (with your personal guarantee on the mortgage).

[Brandon Hall]

@Roy N. My point was that generally, without a personal guarantee, a loan to an entity will be at a higher interest rate because it's riskier for the lender (history shows people let investments and businesses go down the tubes before their personal assets).

If you are personally guaranteeing the entity's loans, you are giving permission to the lender to pierce the corporate veil, and you won't necessarily be required to pay a higher rate.

It depends on the lender though. You should always try to find one that fits your needs.

[Roy Vereen]

Thanks, for the feedback and insight all.  I will research other forums on this topic as well.