Does an LLC Line of Credit Affect Personal Credit?

An LLC is a legal structure for a business. The full name is limited liability company, with many business owners using the structure to separate their personal assets and debts from those of the business. For that purpose an LLC is most effective when all business debts, such as a line of credit, are in the name of the business only. That means the owners of the business are not personally responsible for the debt. In those situations an LLC line of credit would not affect the personal credit of the owner of the business. However, there are exceptions.

Guarantees

Banks often require owners of LLCs to personally guarantee loans approved for the company, including lines of credit. Without a personal guarantee the owner could close the business, file for business bankruptcy and walk away personally unaffected by the line of credit. However, a personal guarantee allows the bank to hold the owner responsible for the loan even if the business closes and files for bankruptcy.

Credit Reports

A personal guarantee on a line of credit for an LLC could cause the credit line to appear on personal credit reports. This can affect personal credit in a number of ways. It could cause a drag on the business owner's credit scores if the LLC is maxing out the line of credit or paying late on the account. Late payments and maintaining high balances on revolving accounts can cause a drop in credit score.

Flexibility

The LLC's owner may find it difficult to qualify for other forms of personal credit if the line of credit appears on his credit reports. Depending on the size of the line of credit, other creditors may feel the business owner already has more personal credit than he can afford.

Precautions

Ideally, small-business owners should not personally guarantee lines of credit or any other loan. That could make gaining approval for significant business credit difficult, but it protects the owner from possible personal financial ruin if the business fails. Some business owners pledge their most important asset -- their house -- as collateral for a line of credit to their LLC. In that situation a bank could foreclose on the owner's house if the business fails and the owner cannot make payments on the LLC.

Solutions

Small-business owners with LLCs can start conservatively with credit by applying for business credit cards with small credit limits. The cards may initially offer credit limits of just a few hundred dollars, but sometimes are available without a personal guarantee. Over time the business owners can add more credit in the same way and ask for credit limit increases -- without a personal guarantee that could affect personal credit. Eventually the company may qualify for a business line of credit based on building a good business credit rating with smaller accounts.