Can I Get a Loan with a Limited Liability Company (LLC)?
You’re probably aware by now that banks make it hard for you to get a loan with an LLC. Usually when you first start out investing in real estate with an LLC, the bank will require you to personally guarantee the loan because the LLC doesn’t have established credit and history of income yet.
Therefore, the lender will look at your personal credit and income history to qualify your business for a loan and make you sign a personal guarantee so if the LLC defaults, the bank can come after your personal assets.
I had a professor back at Ohio State once who taught a course on banks and one thing he drilled into our heads was never sign a personal guarantee.
You’ll have to decide that on your own though because sometimes it’s the only option until you get your business established.
Ask yourself: how much risk are you exposing yourself to and any assets or equity you have if you personally guarantee a loan?
That being said, what are some ways you can build credit with an LLC or build its reputation and get loans without a personal guarantee?
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LLC Credit Line
Try to establish credit lines that will grow with the company.
For example, try to get a credit line that is based on a percentage of your receivables rather than a constant static amount. This way as your business grows, so does your credit line.
A bank will review your credit line annually most likely and will impose ceilings and restrictions so try to get a flexible borrowing relationship with your lender.
Starting out you’ll have to use the LLC Officer’s credit to gain approval under the business name but this can build credit for your LLC if you’re using the EIN or corporate tax number.
Talk to a lender to ensure you are building credit in the company’s name and establishing a history for the company.
Put a paid for property into an LLC to give the LLC some assets. This allows the LLC to have some LLC owned collateral to secure loans to.
It puts that paid for property at risk, but if you’re taking out loans, you better be a responsible borrower in the first place.
Sometimes an investment property, like in commercial lending situations, will suffice if it has good enough cash flow and signed leases by tenants prior to getting the loan.
The lender can base the loan on the net operating income to debt service ratio also known as the Debt Service Coverage Ratio (DSCR).
Overall, you’re going to have to talk with your lender about how you can establish credit with your LLC and work towards non-recourse loans where you no longer have to personally guarantee loans made to the LLC.
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What is the Difference Between a Non-Recourse and a Recourse Loan?
The simple way of explaining the difference is that it comes down to which assets a lender can go after if a borrower fails to repay a loan. Lenders will favor recourse loans while borrowers will favor non-recourse loans.
In both types of loans, the lender can seize assets used as collateral to secure the loan.
Typically, this is the piece of real estate that the loan is being made for you to purchase. The lender would be able to seize the investment property in order to sell it and recoup their loan money should you fail to make payments.
The difference in loan type has to do with money still owed after selling the collateral (investment property).
In a recourse loan, the lender can come after your personal assets to finish paying off the balance still owed or have your wages/salary garnished, which means you take home less each paycheck.
In a non-recourse loan, the lender must absorb the loss if the investment property sells for less than what is owed on the loan.
As borrower you may wish for a non-recourse loan, but remember these create more risk for a bank so that bank is going to be charging higher interest rates to compensate themselves for the increased risk they are taking on.
Additionally, your credit score will still be damaged the same as if you defaulted on other loans.
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LLC Taxes – Frequently Asked Questions
An LLC, unlike a corporation, is not a separate tax entity.
Instead, the IRS considers an LLC as a “pass through entity” just like a partnership or sole proprietorship.
What does this mean?
In terms of taxes, all profits and losses of the LLC pass through the business to the owners. These “owners” are also known as members of the LLC and they simply report the income on their personal tax forms.
Depending on the number of owners in the LLC, the IRS will treat your company different for taxes so it’s important to understand the following two rules:
1. Single Owner LLC
If you are the only owner of the LLC, you are treated like a sole proprietor by the IRS for tax purposes. You report all profits and losses on a Schedule C and submit it with your 1040 tax return.
Read: Tax Schedules and What Each Is For
2. Multi Owner LLC
An LLC that has multiple owners is treated like a partnership for tax purposes by the IRS. The LLC itself does not pay taxes, but the owners must report their share of the income on their personal income tax form.
You’ll fill out a Schedule E which gets attached to your 1040. If you’re unsure what a Schedule E or 1040 is, see this link here.
Q&A: Taxes When You Own an LLC
How do you determine your share of the LLC’s income?
It should be stated in the LLC’s operating agreement. If it is not specifically stated in any documents, then the IRS rules that everyone gets equal share.
So if there is 2 owners, each would get 50% distributable share, unless of course it’s stated otherwise in the documents.
What if the money stays in the LLC bank account and wasn’t distributed to the owners?
The profits earned are still taxed regardless of if you took them out of the company bank account or not.
Do LLC Owner’s Pay Self Employment Tax?
LLC owners/managing members are responsible for paying self-employment tax (Social Security tax and Medicare tax) but they do not have to withhold it from their paycheck. (See next question below for explanation on this)
Do LLC Owners Have to Withhold Taxes For Themselves?
LLC owners are not employees but rather self-employed business owners so they do not need to withhold taxes during the year.
It’s important that you still set aside money to pay your taxes at the end of the year though or else you’ll have a problem when it comes tax time and you can’t afford your tax liability. (insert link)
What You Can Do Next?
- How Do You Make Money Investing in Real Estate?
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