An LLC is a limited liability company. Some business owners choose this legal business structure to separate their personal debts and assets from those of the company. However, complete separation isn't always possible. Many banks and other lenders force owners of an LLC to personally guarantee loans made to the business. That means it is possible in certain instances for a business owner to lose his home because of a lawsuit against the LLC.
Process
Most business owners seeking credit for their LLCs initially apply for financing in the name of the business only. With all credit in the name of the business only, the owners could file for business bankruptcy at any time and walk away with their personal assets unaffected. Thats why many banks insist on personal guarantees before granting credit to an LLC.
Collateral
Some business owners elect to pledge personal real estate as collateral for a business loan to their LLCs. It is a risky move with sometimes dire consequences. If the business fails, the bank could file a foreclosure lawsuit and take the house. The action is possible even if the business files for bankruptcy protection.
Considerations
An LLC does provide protection for the business owner against other types of lawsuits. A customer suffering from a fall in a store could sue the company, but the LLC legal structure usually would prevent the business owner from losing his house because of the lawsuit. In that situation, the assets of the LLC are at risk, but not those of the business owner. The same is true if another company sues the LLC because of a dispute, or some other entity takes legal action.
Protection
Business owners seeking to protect their personal assets should never agree to personally guarantee debt for the LLC. For some prospective business owners, this could mean not going into business at all. Most banks simply are not going to approve a new LLC for say, a $50,000 line of credit without some form of collateral. Established businesses that are profitable may avoid personal guarantees by pledging business assets as collateral. The assets could include an office building or equipment.
Exceptions
Some forms of credit are available to new LLCs without personal guarantees -- although the credit limits are usually small. Office supply stores and home improvement chains may grant an LLC credit cards for a few hundred dollars or a few thousand. From there the business can establish a credit rating and eventually qualify for more credit in the name of the business only.
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